<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
Commission file number: 1-8979
HONDO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware 95-1998768
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification
Number)
410 E. College Blvd., Roswell, New Mexico 88201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (505) 625-8700
Securities registered pursuant to Section 12(b) of the Act:
Name of each
exchange
Title of each class on which registered
------------------- -------------------
Common stock, par American Stock
value $1 per share Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(continued)
1
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant on December 8, 1995 based on the
closing price on the American Stock Exchange of such stock on such
date was $48,113,519.
Registrant's Common Stock outstanding at December 8, 1995 was
13,564,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement
for the annual shareholders meeting are incorporated by reference into
Part III.
2
HONDO OIL & GAS COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K
Caption Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . 16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . 17
Item 6. Selected Financial Data . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 20
Item 8. Financial Statements . . . . . . . . . . . . . . 30
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . 55
PART III
Item 10. Directors and Executive Officers of
the Registrant . . . . . . . . . . . . . . . . . 55
Item 11. Executive Compensation . . . . . . . . . . . . . 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . 55
Item 13. Certain Relationships and Related Transactions . 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . 55
3
PART I
As used in this report, unless the context otherwise requires, the
terms "Registrant", "the Company" and "Hondo Oil" refer to Hondo Oil &
Gas Company and its consolidated subsidiaries.
Item 1. BUSINESS
(a) General Development of Business
The Company is an independent oil and gas company, presently focusing
on international oil and gas exploration and development. The Company
was incorporated as Pauley Petroleum Inc. ("Pauley") in 1958. In
January 1988, The Hondo Company ("Hondo") acquired a controlling
interest in Pauley in exchange (the "Exchange") for all of the
outstanding stock of Hondo's subsidiary, Hondo Oil & Gas Company. In
March 1988, the Company acquired Fletcher Oil and Refining Company
("Fletcher" or the "Fletcher refinery"). In January 1990, Pauley
merged ("the Merger") with the wholly-owned subsidiary acquired in the
Exchange, Hondo Oil & Gas Company. In conjunction with the Merger,
Pauley Petroleum Inc., the surviving corporation, changed its name to
Hondo Oil & Gas Company.
On December 15, 1989, the Company permanently suspended operations at
its wholly-owned subsidiary, Newhall Refining Co., Inc. ("Newhall
refinery"). On March 14, 1990, the Company sold its wholly-owned
subsidiary, Blacktop Materials Co., effective March 1, 1990. During
1991, Hondo Oil adopted plans of disposal for both its refining and
marketing operations and its real estate operations (primarily the
land underlying the Newhall refinery). The Company suspended
operations at its Fletcher refinery on October 1, 1992 and completed a
sale of substantially all of the refining and marketing operations on
October 1, 1993.
In June 1992, the Company completed a sale of substantially all of its
domestic oil and gas assets and repaid a substantial portion of its
long-term debt with the proceeds.
The Company's principal asset is its exploration concession in
Colombia.
(b) Financial Information About Industry Segments
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company presently operates in one segment.
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(c) Narrative Description of Business
INTERNATIONAL OPERATIONS
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas
Limited ("Hondo Magdalena"), participates in the Opon Association
Contract (the "Opon Contract") with Empresa Colombiana de Petroleos
("Ecopetrol"), Opon Development Company ("ODC") and Amoco Colombia
Petroleum Company ("Amoco Colombia"). Ecopetrol is a quasi-
governmental corporate organization wholly-owned by the government of
Colombia. The Opon Contract was entered into between Ecopetrol and
ODC in 1987, and approved by the Ministry of Mines and Energy in 1988,
to explore and develop an area of approximately 190 square miles
located in the Middle Magdalena Basin about 125 miles north of Bogota,
Colombia. The Opon Contract is divided into an exploration period and
an exploitation period and expires in July 2015.
The Opon Contract provides for an exploration period of six years,
which commenced in July 1988 and has been extended through September
30, 1995. If, at the end of the exploration period, no hydrocarbon
accumulation of potential commercial significance has been discovered,
the Opon Contract will terminate. The Opon Contract requires the
associate parties (Amoco Colombia, Hondo Magdalena and ODC) to perform
certain minimum work obligations each year of the exploration period.
The Opon Contract does not prescribe work obligations after the
completion of the exploration period. At the end of the exploration
period, the associate parties may seek to declare the field(s) capable
of producing hydrocarbons to be commercial (capable of repaying
investment and expenses and returning a profit) by presenting an
application to Ecopetrol. Ecopetrol has 90 days to respond to the
associate parties' application. If Ecopetrol agrees, then the
field(s) are declared to be commercial and production may commence.
If Ecopetrol does not agree, it may indicate to the associate parties
the additional work it deems necessary to demonstrate that the
field(s) are commercial. The additional work may take up to one year,
and the exploration period would be extended for the period necessary
to complete the additional work. If Ecopetrol does not agree that the
field(s) are commercial after the completion of the additional work,
the associate parties may proceed to develop and exploit the property,
with Ecopetrol participating after the associate parties recover 200%
of their costs.
Upon the designation of an area or field as commercial, Ecopetrol has
the right to acquire a 50% interest in such area or field and will
reimburse the associate parties for 50% of the direct exploration
costs for each commercial discovery. Thereafter, Ecopetrol will pay
50% of all subsequent costs and will receive 50% of all production.
Hondo Magdalena's interest in the Opon Contract will be reduced by
one-half to approximately 15.4%, if Ecopetrol becomes a party. A
declaration of commerciality will allow Hondo Magdalena to share in
the sale of production during the exploitation period. Prior to a
declaration of commerciality, except for extended production tests,
the associate parties may not sell hydrocarbons from the property.
Revenue from the Opon Contract area is subject to a 20% royalty, which
is paid to the Colombian government.
5
The associate parties have completed the minimum work obligations for
each of the six years of the exploration period, which ended with
completion of the Opon No. 4 well in September 1995 (Ecopetrol has
granted extensions of the exploration period from time to time). An
application for commerciality is expected to be submitted by Amoco
Colombia in January 1996. The commercial field in the application
will be an area around the Opon No. 3 and No. 4 wells. Management
estimates that from $1.0 million to $7.3 million would be recoverable
from Ecopetrol's share of production as direct exploration cost if the
commerciality application is approved. The associate parties expect
the application to approved by approximately April 1996. However, as
explained above, Ecopetrol has the option to require additional work
before commerciality is declared.
The Opon Contract provides that at the end of the exploration period,
if a field capable of producing hydrocarbons in commercial quantities
has been discovered, the Opon Contract area will be reduced by 50%.
Two years thereafter, the Opon Contract area will be further reduced
to 25% of the original area. Two years thereafter, the Opon Contract
area will be reduced to the area of the commercial field or fields
that are in production or development, plus a reserve zone of five
kilometers in width around the productive limit of each field. The
commercial fields plus the zone surrounding each field will become the
area of exploitation. The associate parties designate the acreage to
be released.
The exploration period ended on September 30, 1995. Amoco Colombia
has recently advised the Company that negotiations are continuing with
Ecopetrol over the relinquishment amounts and timing and that no
agreement has been reached. Amoco Colombia submitted a proposed map
for relinquishment of approximately 40% of the Opon Contract area on
December 11, 1995. The Company believes that a reduction of up to 50%
will not cause the loss of material exploration opportunities.
Additional seismic assessment of the Opon Contract area and the
drilling of additional wells will be necessary to evaluate the effects
of further acreage reductions.
Hondo Magdalena acquired its interest in the Opon Contract from ODC.
Prior to fiscal 1993, Hondo Magdalena and ODC drilled four wells to
the shallow Mugrosa formation. Following extended production and
pressure testing, one of these wells was declared a dry hole. In
fiscal 1993, Hondo Magdalena drilled the Lilia No. 10 well to the La
Paz formation at its sole cost. The well was drilled to a total depth
of 10,003 feet. The well encountered mechanical problems after the
logs were run, and it was temporarily plugged and suspended. The well
may be re-entered at a future date. By completing these operations,
Hondo Magdalena acquired an 80% interest in the Opon Contract from
ODC.
Under a Farmout Agreement dated August 9, 1993, Amoco Colombia earned
a 60% participating interest in the Opon Contract, 50% from Hondo
Magdalena and 10% from ODC. Hondo Magdalena retained a 30% interest.
Amoco Colombia paid $3.0 million in cash and paid Hondo Magdalena's
costs related to the Opon No. 3 well, a well drilled to the La Paz
formation. Under the Farmout Agreement, Amoco Colombia paid Hondo
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Magdalena an additional $5.0 million in October 1994 and paid all but
$2.0 million of Hondo Magdalena's costs related to the Opon No. 4
well, also drilled to the La Paz formation.
In July 1995, Hondo Magdalena, ODC and Alliance Petroleum
International Co. ("Alliance") entered into a Purchase and Sale
Agreement under which Hondo Magdalena acquired an additional 0.88875%
interest in the Opon Contract. The interest was held by ODC as
nominee for Alliance. The transaction closed in September 1995 at
which time the consideration of $888,750 was paid by the issuance of
44,438 shares of the Company's common stock. Presently, Amoco
Colombia, Hondo Magdalena and ODC have interests in the Opon Contract
of 60%, 30.88875% and 9.11125%, respectively. Amoco Colombia assumed
the role of operator from Hondo Magdalena on March 1, 1994.
The Opon No. 3 well commenced drilling on October 12, 1993. The Opon
No. 3 well was drilled to a total depth of 12,710 feet and penetrated
a full section of the La Paz formation. Testing of the Opon No. 3 was
completed in September 1994. The well tested at a rate of 45 million
cubic feet of natural gas and 2,000 barrels of condensate per day
through a 42/64-inch opening at the surface with 6,000 pounds-per-
square-inch flowing tubing pressure. The natural gas and condensate
came from 1,118 feet of perforations over the interval from 10,018
feet to 12,348 feet within the La Paz formation. Amoco Colombia noted
that downhole restrictions prevented the well from testing at higher
rates.
Drilling of the Opon No. 4 well, which is located approximately three-
quarters of a mile from the Opon No. 3 well, commenced on February 21,
1995 and was completed in September 1995. The well was drilled to a
depth of 11,500 feet. The well tested at a daily rate of 58 million
cubic feet of natural gas and 1,900 barrels of condensate. The
hydrocarbons were tested from 1,022 feet of perforations in the La Paz
formation through a 40/64-inch opening at the surface with 8,121
pounds-per-square-inch flowing tubing pressure.
The two wells drilled to date have confirmed the existence of a
significant natural gas field. However, the Company has not
attributed proved reserves to the discovery at this time. The rules
concerning reporting of proved reserves require that the hydrocarbons
be recoverable under existing economic and operating conditions. As
described below, the Company's previously announced plans for
transporting and marketing the natural gas have been affected by
recent natural gas and pipeline tariff ceiling price regulations.
Therefore, the Company will not report proved reserves until the
economic factors affecting transportation and marketing arrangements
become more certain.
Prior to Hondo Magdalena's participation, eight wells had been drilled
to various depths in the Opon Contract area. All of these wells are
the property of Ecopetrol, and are not considered to be included in
the Opon Contract area. None of these wells are currently producing
and none of the former contract holders have any rights in the Opon
Contract.
7
The principal objective at Opon is to confirm and commercially develop
hydrocarbons from the La Paz formation. However, geologic and
geophysical modeling indicates that, in addition to the potentially
significant hydrocarbons discovered in the Opon No. 3 and No. 4 wells,
other potential hydrocarbon-bearing traps may lie within the Opon
Contract area. Other traps and formations are possible objectives of
further exploration efforts.
Operations in the Opon Contract area are subject to the operating
risks normally associated with exploration for, and production of, oil
and gas, including blowouts, cratering, and fires, each of which could
result in damage to, or destruction of, the oil and gas wells,
formations or production facilities or properties. In addition, there
are greater than normal mechanical drilling risks at the Opon Contract
area associated with high pressures in the La Paz and other
formations. These pressures may: cause collapse of the well bore,
impede the drill string while drilling, or cause difficulty in
completing a well with casing and cement. These potential problems
were substantially overcome in the drilling of the Opon No. 3 and No.
4 wells by the use of a top-drive drilling rig, heavy-weight drilling
fluids and other technical drilling enhancements.
Production is subject to political risks inherent in all foreign
operations, including: (i) loss of revenue, property, and equipment as
a result of unforeseen events such as expropriation, nationalization,
war and insurrection, (ii) risks of increases in taxes and
governmental royalties, (iii) renegotiation of contracts with govern-
mental entities, as well as, (iv) changes in laws and policies
governing operations of foreign-based companies in Colombia. In the
past, guerilla activity in Colombia has disrupted the operation of oil
and gas projects, including site preparation at the Opon Contract area
during fiscal 1991. Security in the area has been significantly
improved and the associate parties have taken steps to enhance
relations with the local population through a community relations
program initiated in 1991. Since that time, operations have not been
impeded. The government also continues its efforts through
negotiation and legislation to ameliorate the problems and effects of
insurgent groups, including regulations containing sanctions such as
impairment or loss of contract rights on companies and contractors if
found to be giving aid to such groups. Hondo Magdalena will continue
to cooperate with the government, and does not expect that future
guerilla activity will have a material impact on the exploration and
development of the Opon Project. However, there can be no assurance
that such activity will not occur or have such an impact and no
opinion can be given on what steps the government may take in response
to any such activity.
Marketing arrangements for the sale of oil and natural gas will have
to be made. The government of Colombia has recently established a
natural gas policy and is pursuing a program to maximize the
utilization of natural gas throughout the country, including the
industrial cities of Medellin, Cali and Bogota, where developed
markets and infrastructure do not currently exist. The Colombian
government's policy on natural gas is intended to increase the
consumption of natural gas in order to provide a more balanced use of
8
energy resources. The policy includes the use of natural gas in place
of higher cost electricity and in place of wood to reduce
deforestation. The government intends to encourage the development of
markets for natural gas and is pursuing the development of pipeline
transportation systems for new markets. The proximity of the Opon
Contract area to these potential gas markets will be an advantage for
marketing the natural gas.
As a first step toward developing a market for the hydrocarbons
discovered to date, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol
executed a Memorandum of Understanding ("MOU") in July 1995 for the
construction of a pipeline and wellhead facilities (which were not
contemplated in the Opon Contract) and the sale of natural gas from
the Opon Contract area. The MOU provides that the parties will
construct a 16 inch pipeline approximately 88 kilometers in length
from the Opon Contract area north to Ecopetrol's gas processing plant
at El Centro, and from there to Ecopetrol's refinery at
Barrancabermeja. The pipeline will have a capacity of 120 million
cubic feet per day and is estimated to cost $59.0 million. Hondo
Magdalena, ODC and Amoco Colombia will each pay their respective share
of the costs incurred prior to July 1, 1995, up to a maximum of 10% of
the total pipeline costs. Ecopetrol will pay cash for its share of
pipeline costs incurred after July 1, 1995, if and when the field is
declared commercial. After commerciality, the remainder of
Ecopetrol's share of costs (those incurred prior to July 1, 1995) will
be recovered out of production. The investment in pipeline costs will
be recovered through a pipeline tariff that will include a 13.2% rate
of return (after Colombian taxes) on the investment. In the MOU,
Ecopetrol agreed to construct improvements at its El Centro gas
processing plant to handle incremental production from the Opon
Contract area. Ecopetrol will recover its investment through a gas
processing fee that will include a 13.2% rate of return (after
Colombian taxes). The parties agreed in the MOU to negotiate a
contract for gas processing. Ecopetrol agreed to fund 80% of its
share of wellhead facilities (total estimated cost of $11.9 million)
in cash with 20% to be recovered subsequently from production.
The MOU also provides that the parties will negotiate a gas sales
contract under which Ecopetrol will purchase from the Opon Contract
parties, on a take-or-pay basis, 80 million cubic feet of natural gas
per day for the first three years after production begins, and 40
million cubic feet per day for the subsequent twelve years. The price
for the natural gas will be determined semi-annually by a formula
based upon the average price received by Ecopetrol for exported fuel
oil during the prior two six-month periods.
The Colombian government recently formed the Comision de Regulacion de
Energia y Gas (Commission for the Regulation of Energy and Gas,
"CREG"), an agency of the Ministry of Mines and Energy. CREG has
adopted new regulations dealing with pricing and transportation of
natural gas. These regulations set a ceiling price for natural gas
and a maximum rate of return of 12.5% (before Colombian taxes) for
pipeline tariffs. The ceiling price has been interpreted to include
costs or fees for the processing of natural gas, thus processing costs
cannot be passed on to the buyer. These new regulations will reduce
9
the amount the Company expects to receive for natural gas and pipeline
tariffs in the future and may affect the completion of the agreements
expressed in the MOU. Based on these new regulations Ecopetrol has
expressed an unwillingness to provide the terms outlined in the MOU
related to the buyer's payment of gas processing fees and the 13.2%
rate of return (after Colombian taxes) included in the pipeline
tariff. The final sales contracts contemplated by the MOU have not
been completed. In December 1995, Amoco Colombia advised the Company
that the pipeline project is in doubt.
Preliminary work for the pipeline, which began in late 1994, has been
completed and the pipe has been purchased and delivered to the port
city of Cartagena. Subject to the resolution of questions about the
MOU, as described above, completion of construction of the pipeline is
currently scheduled in the summer of 1996. However, Amoco Colombia
recently learned that a new environmental impact statement and permit
for facilities at the wellhead will be required by the Colombian
Ministry of the Environment. This unanticipated regulatory
requirement could delay the date of first production well into 1997.
A $6.3 million program for acquisition of additional seismic data,
using two-dimensional technology, has recently commenced. Amoco
Colombia advised the Company in December 1995 that a previously
approved, $13.3 million, seismic data acquisition program using three-
dimensional technology had been suspended because of technical
concerns as to the quality of the data that would be acquired.
Preparation for drilling of the developmental, $23.5 million, Opon No.
5 well began in the fall of 1995. However, Amoco Colombian advised
the Company in December 1995 that drilling of the Opon No. 5 well has
been indefinitely delayed due to right-of-way disputes with
landowners. In addition, the associate parties have agreed to study
the feasibility of another pipeline to the west to provide additional
markets.
Development of the Opon Project will require significant future
capital expenditures for which the Company will need additional funds.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources in Item 7.
10
U.S OIL AND GAS OPERATIONS
The Company explored for, developed and produced oil and gas in
approximately 13 states from 1987 until 1992. In June 1992, the
Company completed a sale of substantially all of its domestic oil and
gas assets. The Company's departure from the domestic oil and gas
business was in part driven by management's belief that more
profitable exploration and production opportunities exist abroad.
DISCONTINUED OPERATIONS
Refining and Marketing Operations
On October 1, 1993, the Company completed the sale of the common stock
of its Fletcher refinery and the assets of the Hilo, Hawaii asphalt
terminal. The Company's 41,000 bbl asphalt barge was sold in May
1993. An asphalt terminal in Honolulu, Hawaii and two gasoline
stations acquired through bankruptcy proceedings against a former
customer of Fletcher were disposed of in 1994. There are no remaining
assets of the refining and marketing operations. See Note 12 to the
Consolidated Financial Statements in Item 8.
Real Estate Operations
On December 15, 1989, the Company suspended operations at its Newhall
refinery. Subsequently, the Company adopted a plan of disposition
which included dismantling the refinery, effecting environmental
remediation of the land and further developing the land to a condition
where it may be sold. Execution of the plan was suspended in
September 1993 and the Company is now marketing the site in its
current condition and with existing land-use entitlements. The
Newhall refinery site consists of approximately 105 acres located
adjacent to a major freeway intersection in northern Los Angeles
County. See Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 and Note 12 to the
Consolidated Financial Statements in Item 8.
The Company owns in fee simple approximately 11 acres of undeveloped
land located in eastern Los Angeles County. This parcel is currently
under option to a developer for a price of $3.0 million.
Each of the above real properties is subject to a mortgage in favor of
Lonrho Plc. See Note 6 to the Consolidated Financial Statements in
Item 8.
COMPETITIVE FACTORS
Because of the sale of substantially all of the Company's domestic oil
and gas properties in 1992 and the sale of substantially all of its
discontinued refining and marketing assets in 1993, the only
competition the Company currently faces domestically is from other
parties offering undeveloped raw land for sale in Los Angeles County.
11
Other parties have developed or announced discoveries of natural gas
in Colombia. These reserves and potential reserves exist on the north
coast of Colombia and in the Llanos Basin, east of the Company's
interest at the Opon Contract area. In the developing gas market of
Colombia, these gas supplies will compete for existing and new
markets, and for access to transportation facilities for natural gas.
Such competition may adversely affect the Company's ability to market
its natural gas and/or the price of natural gas. No prediction can be
made at this time as to the effect such competition will ultimately
have upon the Company. Many of the Company's competitors are large
integrated oil companies having diverse operations and stronger
capitalization.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Environmental matters
The Company's operations are subject to certain federal, state and
local laws and regulations governing the management of hazardous
materials, the discharge of pollutants into the environment and the
handling and disposal of solid and hazardous waste.
(1) General
Minor spillage or discharge of petroleum and related substances
are a common occurrence at oil refineries and at oil and gas
production and drilling facilities. Such spills and discharges
could create liability under various federal, state and local
environmental laws and regulations. As is the case with other
companies engaged in oil and gas exploration, production and
refining, the Company faces exposure from potential claims and
lawsuits involving environmental matters. These matters may
involve alleged soil and water contamination and air pollution.
The Company's policy is to accrue environmental and clean-up
costs when it is probable that a liability has been incurred and
the amount of the liability is reasonably estimable. However,
future environmental related expenditures cannot be reasonably
quantified in many circumstances due to the conjectural nature of
remediation and clean-up cost estimates and methods, the
imprecise and conflicting data regarding the characteristics of
various types of waste, the number of other potentially
responsible parties involved and changing environmental laws and
interpretations. The reduced scope of the Company's operations
following the sale of the Company's domestic oil and gas
properties and the Fletcher refinery has significantly reduced
the Company's potential exposure to environmental liability.
(2) Newhall Refinery Site
The Company has evaluated the Newhall Refinery site to determine
the impact of refining activities on the environment. The
Company has conducted an environmental assessment of the refinery
site and a remediation plan for the site has been submitted to
the Regional Water Quality Control Board and has received staff
12
approval. The Company estimates that $2.0 million would be
incurred in executing the approved remediation plan; however, the
Company expects to sell the property without incurring these
costs by reducing the purchase price. The Company has requested
changes in the approved plan that will reduce estimated
remediation costs to $1.0 million. The Company's estimate of the
net realizable value of this property has been reduced by
estimated remediation costs in determining the carrying value of
the property and therefore the remediation costs will not affect
future results of operations. See Note 12 to the Consolidated
Financial Statements in Item 8.
(3) Fletcher Refinery
Generators of hazardous substances found in disposal sites at
which environmental problems are alleged to exist, as well as the
owners of those sites and certain other classes of persons, are
subject to claims brought by state and federal regulatory
agencies. Fletcher has been notified by the EPA that it is a
potentially responsible party in a proceeding under the
Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"). The notice relates to the Operating Industries,
Inc. ("OII") dump site in Monterey Park, California. During
fiscal 1993, the Company sold the Fletcher refinery in a stock
sale through which the purchaser assumed environmental
liabilities of Fletcher, known and unknown. Any liability
related to OII (to which Fletcher has asserted the defense of
bankruptcy discharge and with respect to which Fletcher entered
into a settlement with certain potentially responsible parties at
the time of the bankruptcy) remains a liability of Fletcher and
is no longer a liability of the Company. However, the statutes
impose liability on "owners" and "operators," and these statutes
have been used to assert claims against controlling shareholders
of corporations involved in claims under CERCLA and related
statutes. The Company is sole shareholder of Pauley Pacific Inc.
which was sole shareholder of Fletcher. The assertion of such a
claim against the Company in the case of OII is considered by
management to be remote, since the Company was not an owner of
Fletcher until after the events occurred that are the basis of
the notice to Fletcher on the OII dump site.
Government Regulations and Legislative Proposals
The Company is subject to governmental regulations which include
various controls on the exploration for, production, sale, and
transportation of crude oil and natural gas in Colombia. See
International Operations above, particularly the description of recent
regulations adopted by CREG. A number of foreign, federal and other
legislative proposals, if enacted, may have adverse effects on
companies in the petroleum industry, including the Company. These
proposals involve, among other matters, the imposition of additional
taxes, price controls, land use controls and other restrictive
measures. The Company cannot determine to what extent future
operations and earnings may be affected by new regulations or changes
in current regulations.
13
EMPLOYEES
The Company employed 5 full-time personnel as of September 30, 1995.
(d) Financial Information About Foreign Operations
See Note 11 to the Consolidated Financial Statements in Item 8. The
Company operates in one foreign location: Colombia, South America.
See International Operations in Item 1.
Item 2. PROPERTIES
OIL AND GAS PROPERTIES
All significant producing properties and proved oil and gas reserves
located in the United States were sold during 1992. The Company's
principle asset is its interest in the Opon Association Contract (the
"Opon Contract"), an exploration concessions for an area in the Middle
Magdalena Valley of Colombia, South America. Two wells drilled during
1994 and 1995 have confirmed the existence of a significant natural
gas field. The Company has not yet attributed proved reserves to this
discovery because of economic uncertainties regarding transportation
and marketing arrangements. See International Operations in Item 1.
The information about the Company's net interest in the various items
presented below is based on the Company's interest in the Opon
Contract area of 30.88875% as of September 30, 1995. The Company's
interest is subject to a 50% reduction upon approval of an application
for commerciality, which is expected to occur in 1996. In addition,
the Opon Contract provides for three reductions of the gross acreage
included in the Opon Contract area, one of which is expected to occur
in fiscal 1996. See International Operations in Item 1 for more in-
depth descriptions of commerciality and acreage relinquishments.
(1) Estimated net quantities of proved oil and gas reserves, results
of operations from oil and gas producing activities and the
standardized measure of discounted future net cash flows relating
to proved oil and gas reserve quantities for the years ended
September 30, 1995, 1994 and 1993 are not presented as they are
not presently applicable.
(2) No estimates of total proved net oil and gas reserves have been
filed with any federal agency during fiscal 1995, including this
Annual Report on Form 10-K as filed with the Securities and
Exchange Commission.
(3) No production income and cost per unit data for the years ended
September 30, 1995, 1994 and 1993 exists and none will be
reported until production in Colombia commences.
(4) The Company had two (0.6 net) wells capable of production
(located in Colombia) at September 30, 1995. A portion of the
undeveloped acreage described in (5) below will be attributed to
these wells after commerciality is declared.
14
(5) Undeveloped acreage at September 30, 1995, all located in
Colombia, consists of 123,658 gross acres, or 38,196 net acres,
contained within the Opon Association Contract area.
(6) Wells completed (all located in Colombia) for the years ended
September 30:
1995 1994 1993
____ ____ ____
Productive exploratory 0.3 0.3 -
Dry exploratory - - 1.0
Productive development - - -
Dry development - - -
(7) Present activity at September 30, 1995: No wells were in process
as of September 30, 1995.
(8) Delivery Commitments:
The Company has agreed to negotiate a contract for sales of
specific quantities of natural gas from the Company's wells in
Colombia in a Memorandum of Understanding. See International
Operations in Item 1. The contracts contemplated in the MOU have
not been completed. The Company believes the reserves discovered
in the Opon No. 3 and 4 wells are adequate to meet these
contemplated sales commitments.
OTHER PROPERTIES
Refer to Item 1 for descriptions of properties owned by the Company
other than those described in Item 2, above.
15
Item 3. LEGAL PROCEEDINGS
The Company is involved in a number of legal and administrative
proceedings incident to the ordinary course of its business. In the
opinion of management, any liability to the Company relative to the
various proceedings will not have a material adverse effect on the
Company's operations or financial condition.
The Company has evaluated the Newhall Refinery site to determine the
impact of refining activities on the environment. The Company has
conducted an environmental assessment of the refinery site and a
remediation plan for the site has been submitted to the Regional Water
Quality Control Board and has received staff approval. The Company
estimates that $2.0 million would be incurred in executing the
approved remediation plan; however, the Company expects to sell the
property without incurring these costs by reducing the purchase price.
The Company has requested changes in the approved plan that will
reduce estimated remediation costs to $1.0 million. The Company's
estimate of the net realizable value of this property has been reduced
by estimated remediation costs in determining the carrying value of
the property and therefore the remediation costs will not affect
future results of operations. See Note 12 to the Consolidated
Financial Statements in Item 8.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Closing stock price ranges for the quarterly periods during the fiscal
years ended September 30, 1995 and 1994, as reported by the American
Stock Exchange Monthly Market Statistics reports, were as follows:
December 31 March 31 June 30 September 30
___________ ________ _______ ____________
Fiscal 1995:
Low $ 11.50 $ 9.38 $ 11.88 $ 18.50
High $ 16.25 $ 14.00 $ 18.50 $ 24.13
Fiscal 1994:
Low $ 5.75 $ 5.88 $ 6.00 $ 9.75
High $ 8.38 $ 7.63 $ 12.50 $ 19.88
The common stock is listed on the American Stock Exchange under the
symbol HOG. The Company does not fully meet all of the guidelines of
the American Stock Exchange for continued listing of its shares. The
delisting policies and procedures of the Exchange provide guidelines
under which the Exchange will normally give consideration to
suspending dealings in a security, or removing a security from
listing. Among those guidelines that may be applicable to the Company
are: (i) having stockholders' equity of less than $2,000,000 if such
company has sustained losses from continuing operations and/or net
losses in two of its three most recent fiscal years; or (ii) having
sustained losses which are so substantial in relation to its overall
operations or its existing financial resources, or its financial
condition has become so impaired that it appears questionable, in the
opinion of the Exchange, as to whether such company will be able to
continue operations and/or meet its obligations as they mature; or
(iii) having sold or otherwise disposed of its principal operating
assets or has ceased to be an operating company or has discontinued a
substantial portion of its operations or business for any reason
whatsoever. Where the company has substantially discontinued the
business that it conducted at the time it was listed or admitted to
trading, and has become engaged in ventures or promotions which have
not developed to a commercial stage or the success of which is
problematical, it shall not be considered an operating company for the
purposes of continued trading and listing on the Exchange.
The number of shareholders of record on December 8, 1995 was 756.
DIVIDEND POLICY
The Company has not paid a dividend on its common stock in the two
most recent fiscal years, nor has it ever done so. The Company's loan
agreement with Thamesedge, Ltd. restricts the payment of dividends to
35% of the Company's Consolidated Net Adjusted Income (as defined in
the loan agreement) plus $2.0 million. Since the Company has incurred
net losses during this fiscal year and prior years, the payment of
dividends is restricted.
17
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<HEADING>
For the Fiscal Year Ended September 30,
---------------------------------------------------------
1995 1994 1993 1992 a 1991
--------- --------- --------- --------- ---------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue $44 $728 $980 $50,557 $81,764
Gain (loss) on sale
of assets -- (1,240) (8) 21,403 1,376
Operating expenses 1,941 2,880 5,910 38,687 59,055
Depreciation, depletion
and amortization 266 220 365 16,230 18,998
Interest expense 4,680 4,605 3,411 9,939 12,790
Provision for income taxes 113 (199) (46) (285) 1,116
--------- --------- --------- --------- ---------
Income (loss) from
continuing operations (6,956) (8,018) (8,668) 7,389 (8,819)
Loss from discontinued
operations (4,950) b (3,038) b (15,176) c (64,147) d (37,511) d
--------- --------- --------- --------- ---------
Net Loss ($11,906) ($11,056) ($23,844) ($56,758) ($46,330)
========= ========= ========= ========= =========
Earnings (loss) per share:
Continuing operations ($0.53) ($0.62) ($0.67) $0.57 ($0.68)
Discontinued operations (0.37) (0.23) (1.16) (4.94) (2.90)
--------- --------- --------- --------- ---------
($0.90) ($0.85) ($1.83) ($4.37) ($3.58)
========= ========= ========= ========= =========
Weighted average common
shares outstanding 13,171 13,009 13,007 13,001 12,931
========= ========= ========= ========= =========
</TABLE>
18
<TABLE>
<HEADING>
For the Fiscal Year Ended September 30,
---------------------------------------------------------
1995 1994 1993 1992 a 1991
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Working capital (deficit) ($1,077) $2,413 $1,729 $8,142 ($31,447)
========= ========= ========= ========= =========
Properties, net $12,777 $10,855 $15,910 $10,758 $118,795
========= ========= ========= ========= =========
Net assets of
discontinued operations $2,978 b $6,851 b $7,750 c $24,129 d $51,546 d
========= ========= ========= ========= =========
Total assets $18,398 $24,908 $30,142 $59,532 $196,039
========= ========= ========= ========= =========
Long-term debt $82,213 $81,888 $78,828 $67,005 $114,348
========= ========= ========= ========= =========
Shareholders'
equity (deficit) ($73,364) ($66,681) ($55,815) ($31,971) $23,354
========= ========= ========= ========= =========
</TABLE>
a In June 1992, the Company sold substantially all of its domestic oil
and gas operations and repaid significant portions of its debt with
the proceeds from the sale.
b The Company recorded valuation provisions against the carrying
value of its discontinued real estate operations and accrued for a
contingent liability arising from its discontinued refining and
marketing operations in 1994 and 1995.
c The Company completed the sale of substantially all of its
discontinued refining and marketing segment and recorded valuation
provisions against the carrying value of its discontinued real estate
segment in 1993.
d The Company recorded valuation provisions against the carrying value
of its discontinued segments in 1992 and 1991.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
Hondo Oil & Gas Company is an independent oil and gas company focusing
on international oil and gas exploration and development. The
Company's domestic exploration and production assets were sold in 1992
and substantially all of its refining and marketing assets were
disposed of in 1993. Today, the Company's principal asset is its
interest in the Opon Association Contract (the "Opon Contract"), an
exploration concession for an area in the Middle Magdalena Valley of
Colombia, South America. Significant reserves of natural gas and
condensate have been shown to exist in the Opon Contract area by two
discovery wells drilled during 1994 and 1995. However, significant
projects, primarily construction of a pipeline, must be completed
before the natural gas and condensate can be brought to market.
Revenues are not currently being generated and are not expected to
commence until the spring of 1997 at the earliest.
During December 1995 the Company has encountered the following
circumstances regarding its operations in Colombia:
- A new governmental agency in Colombia has adopted regulations
relating to pipeline tariffs and natural gas prices that are less
favorable than terms the Company had agreed in July 1995. This
has placed construction of a pipeline already underway, and
execution of contracts for sales and transportation of natural
gas (for which primary terms had already been agreed) in doubt.
- The operator of the Opon Contract has withdrawn the budget for
1996 exploration and development activities because of
impediments to planned exploration and development activities.
Further meetings to redetermine what activities will be carried
out in 1996 will not occur until January 1996.
These changes will delay management's efforts to acquire long-term
financing for development of the Opon project.
Opon Exploration
----------------
Hondo Magdalena Oil & Gas Limited ("Hondo Magdalena"), a wholly-owned
subsidiary, became involved in the Opon Contract through a farmout
agreement with Opon Development Company ("ODC") in 1991. During 1991,
1992 and 1993, Hondo Magdalena and ODC drilled four shallow oil wells
to the Mugrosa formation, one of which was a dry hole, and one deep
gas well to the La Paz formation. These efforts met with limited
success. In August 1993, Hondo Magdalena and ODC entered into a
Farmout Agreement under which Amoco Colombia Petroleum Company ("Amoco
Colombia") earned a 60% participating interest in the Opon Contract.
To earn the interest, Amoco Colombia paid $3.0 million in cash in 1993
and paid all of the costs related to drilling the Opon No. 3 well in
1994. In addition, Amoco Colombia paid Hondo Magdalena $5.0 million
in October 1994 and paid all but $2.0 million of Hondo Magdalena's
costs for drilling the Opon No. 4 well in 1995.
20
The Opon No. 3 well, completed in September 1994, was drilled to a
depth of 12,710 feet at a total cost of approximately $30.0 million.
The well tested at a daily rate of 45 million cubic feet of natural
gas and 2,000 barrels of condensate. The hydrocarbons were tested
from 1,118 feet of perforations in the La Paz formation through a
42/64-inch opening at the surface with 6,000 pounds-per-square-inch
flowing tubing pressure. Downhole restrictions prevented the well
from testing at higher rates.
The Opon No. 4 well, completed in September 1995, was drilled to a
depth of 11,500 feet at a total cost of approximately $28.5 million.
The well tested at a daily rate of 58 million cubic feet of natural
gas and 1,900 barrels of condensate. The hydrocarbons were tested
from 1,022 feet of perforations in the La Paz formation through a
40/64-inch opening at the surface with 8,121 pounds-per-square-inch
flowing tubing pressure.
The two wells drilled to date have confirmed the existence of a
significant natural gas field. However, the Company has not
attributed proved reserves to the discovery at this time. The rules
concerning reporting of proved reserves require that the hydrocarbons
be recoverable under existing economic and operating conditions. As
described below, the Company's previously announced plans for
transporting and marketing the natural gas have been affected by
recent natural gas and pipeline tariff ceiling price regulations.
Therefore, the Company will not report proved reserves until the
economic factors affecting transportation and marketing arrangements
become more certain.
In July 1995, Hondo Magdalena, ODC and Alliance Petroleum
International Co. ("Alliance") entered into a Purchase and Sale
Agreement under which Hondo Magdalena acquired an additional 0.88875%
interest in the Opon Contract. The interest was held by ODC as
nominee for Alliance. The transaction closed in September 1995 at
which time the consideration of $888,750 was paid by the issuance of
44,438 shares of the Company's common stock. Presently, Amoco
Colombia, Hondo Magdalena and ODC have interests in the Opon Contract
of 60%, 30.88875% and 9.11125%, respectively. Amoco Colombia assumed
the role of operator from Hondo Magdalena on March 1, 1994.
In accordance with the Opon Contract, Empresa Colombiana de Petroleos
("Ecopetrol"), the Colombian national oil company, has the right to
acquire a 50% interest in the Opon Contract area when commerciality is
declared and will reimburse the associate parties for 50% of the
direct exploration costs out of Ecopetrol's share of production. An
application for commerciality is expected to be submitted by Amoco
Colombia to Ecopetrol in January 1996. The commercial field in the
application will be an area around the Opon No. 3 and No. 4 wells.
The Company estimates the application will be approved by
approximately April 1996. However, under the Opon Contract, Ecopetrol
has the option to require additional work before commerciality is
declared.
The Opon Contract also provides for the Opon Contract area to be
reduced by 50% at the end of the exploration period, September 30,
21
1995 (as extended by Ecopetrol). Two more acreage relinquishments are
scheduled at the end of two successive two-year periods. The Company
previously reported that Ecopetrol had verbally informed Amoco
Colombia that Ecopetrol would defer the 50% acreage relinquishment due
September 30, 1995. This deferral did not occur. Amoco Colombia has
recently advised the Company that negotiations are continuing with
Ecopetrol over the relinquishment amounts and timing and that no
agreement has been reached. Amoco Colombia submitted a proposed map
for relinquishment of approximately 40% of the area on December 11,
1995. The Company believes that a reduction of up to 50% will not
cause the loss of significant exploration opportunities. Additional
seismic assessment of the Opon Contract area and the drilling of
additional wells will be necessary to evaluate the effects of further
acreage reductions.
On July 26, 1995, Hondo Magdalena, ODC, Amoco Colombia and Ecopetrol
executed a Memorandum of Understanding ("MOU") for the construction of
a pipeline and wellhead facilities (which were not contemplated in the
Opon Contract) and the sale of natural gas from the Opon Contract
area. The MOU provides that the parties will construct a 16 inch
pipeline approximately 88 kilometers in length from the Opon Contract
area north to Ecopetrol's gas processing plant at El Centro, and from
there to Ecopetrol's refinery at Barrancabermeja. The pipeline will
have a capacity of 120 million cubic feet per day and is estimated to
cost $59.0 million. Hondo Magdalena, ODC and Amoco Colombia will each
pay their respective share of the costs incurred prior to July 1,
1995, up to a maximum of 10% of the total pipeline costs. Ecopetrol
will pay cash for its share of pipeline costs incurred after July 1,
1995, if and when the field is declared commercial (now anticipated to
occur approximately April 1996). After commerciality, the remainder
of Ecopetrol's share of costs (those incurred prior to July 1, 1995)
will be recovered out of production. The investment in pipeline costs
will be recovered through a pipeline tariff that will include a 13.2%
rate of return (after Colombian taxes) on the investment. In the MOU,
Ecopetrol agreed to construct improvements at its El Centro gas
processing plant to handle incremental production from the Opon
Contract area. Ecopetrol will recover its investment through a gas
processing fee that will include a 13.2% rate of return (after
Colombian taxes). The parties agreed in the MOU to negotiate a
contract for gas processing. Ecopetrol agreed to fund 80% of its
share of wellhead facilities (total estimated cost of $11.9 million)
in cash with 20% to be recovered subsequently from production.
The MOU also provides that the parties will negotiate a gas sales
contract under which Ecopetrol will purchase from the Opon Contract
parties, on a take-or-pay basis, 80 million cubic feet of natural gas
per day for the first three years after production begins, and 40
million cubic feet per day for the subsequent twelve years. The price
for the natural gas will be determined semi-annually by a formula
based upon the average price received by Ecopetrol for exported fuel
oil during the prior two six-month periods. The formula, as of July
1, 1995, yields a price of US$1.17 per million British Thermal Units.
The price for natural gas ultimately received by the Company under the
contract contemplated by the MOU will depend on future prices of
exported fuel oil.
22
The Colombian government recently formed the Comision de Regulacion de
Energia y Gas (Commission for the Regulation of Energy and Gas,
"CREG"), an agency of the Ministry of Mines and Energy. CREG has
adopted new regulations dealing with pricing and transportation of
natural gas. These regulations set a ceiling price for natural gas
and a maximum rate of return of 12.5% (before Colombian taxes) for
pipeline tariffs. The ceiling price has been interpreted to include
costs or fees for the processing of natural gas, thus processing costs
cannot be passed on to the buyer. These new regulations will reduce
the amount the Company expects to receive for natural gas and pipeline
tariffs in the future and may affect the completion of the agreements
expressed in the MOU. Based on these new regulations Ecopetrol has
expressed an unwillingness to provide the terms outlined in the MOU
related to the buyer's payment of gas processing fees and the 13.2%
rate of return (after Colombian taxes) included in the pipeline
tariff. The final sales contracts contemplated by the MOU have not
been completed. In December 1995, Amoco Colombia advised the Company
that the pipeline project is in doubt.
Preliminary work for the pipeline, which began in late 1994, has been
completed and the pipe has been purchased and delivered to the port
city of Cartagena. Subject to the resolution of questions about the
MOU, described above, completion of construction of the pipeline is
currently scheduled in the summer of 1996. However, Amoco Colombia
recently learned that a new environmental impact statement and permit
for facilities at the wellhead will be required by the Colombian
Ministry of the Environment. This regulatory requirement could delay
the date of first production well into 1997. However, Amoco Colombia
is attempting to expedite the regulatory process.
A $6.3 million program for acquisition of additional seismic data,
using two-dimensional technology, has recently commenced. Amoco
Colombia advised the Company in December 1995 that a previously
approved, $13.3 million, seismic data acquisition program using three-
dimensional technology had been suspended because of technical
concerns as to the quality of the data that would be acquired.
Preparation for drilling of the developmental, $23.5 million, Opon No.
5 well began in the fall of 1995. However, Amoco Colombian advised
the Company in December 1995 that drilling of the Opon No. 5 well has
been indefinitely delayed due to right-of-way disputes with
landowners. Because of these changes, and because of the present
uncertainties described above regarding the MOU, Amoco Colombia has
withdrawn the 1996 budget and will propose a new budget to Hondo
Magdalena and ODC in January 1996. The location, timing, nature
(developmental or exploratory), and objective (oil or gas) of
additional wells have not been determined. Acquisition of the seismic
data described above will have a bearing on these determinations. In
addition, the associate parties have agreed to study the feasibility
of another pipeline to the west to provide additional markets.
The results of the Opon No. 3 and Opon No. 4 wells have confirmed the
existence of a significant natural gas field in the Opon Contract
area. However, the Company must resolve the present uncertainties
about its current plans, or devise alternative plans, to bring the
discovered gas to market.
23
Corporate Activities
--------------------
In 1995, the Company reduced its employee count from six to five and
otherwise kept general and administrative expenses at the lowest
levels prudent to maintain its business. The Company has leased
office space in Houston, Texas and plans to move its principal offices
to that location in early 1996 to facilitate its relationships with
Amoco Colombia, the international oil and gas community in general,
and travel to Colombia.
In August 1995, the Company announced that its controlling
shareholder, The Hondo Company ("Hondo"), had proposed a downstream
merger through which Hondo would be merged into the Company. Hondo
owns 10,150,200 shares, or approximately 76% of the issued and
outstanding shares, of the Company, and Hondo is ultimately owned 50%
by Lonrho Plc and 50% by Robert O. Anderson and his family (the
"Anderson Family"). The transaction was proposed under a Settlement
Agreement dated August 23, 1995 between the Anderson Family and Lonrho
Plc and certain of its subsidiaries that resolved certain financial
and legal disputes between the parties. See Amendment No. 1 to
Schedule 13D filed on August 31, 1995, by Lonrho Plc, Lonrho, Inc. and
Scottsdale Princess Inc. The Company's Board of Directors appointed a
Special Committee to consider and approve such a transaction and the
Special Committee selected special financial and legal advisors. The
costs of the Special Committee and its advisors were not borne by the
Company. Terms of a proposed transaction were under negotiation until
mid-December 1995. On December 20, 1995, Lonrho Plc and the Anderson
Family entered into a Revised Settlement Agreement. At the same time,
the proposed transaction with the Company was withdrawn. Under the
Revised Settlement Agreement, the parties will reallocate their
ownership in Hondo and there will be no effect on the Company or its
shareholders except changes in the ownership of the controlling
shareholder of the Company. Upon closing of the Revised Settlement
Agreement, Lonrho Plc will own or control 75% of Hondo, will have an
option to acquire the remaining 25% of Hondo in three years, and will
have sole control of the Company.
Discontinued Operations
-----------------------
The Company began an effort to sell its refining and marketing assets
in April 1991. On October 1, 1993 the Company completed a transaction
for the sale of its Fletcher refinery and asphalt terminal in Hilo,
Hawaii. The Company received net proceeds of $1.1 million in 1994.
Further proceeds, currently estimated at $0.4 million, are to be
received when certain components of the refinery equipment are sold by
the buyer. The Company completed disposal of the remaining minor
portions of the refining and marketing assets during 1994.
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $0.3 million for
certain federal and state excise taxes arising from periods prior to
the sale. In September 1994, the Company accrued a contingent
liability of $1.4 million for the indemnification because of an audit
for California Motor Vehicle Fuels Tax. An additional accrual of $0.7
24
million was recorded in 1995, primarily due to increased estimates of
penalties and interest. The audit, when concluded, could result in a
liability different from the amount accrued. See Note 12 to the
Consolidated Financial Statements in Item 8.
Included in the Company's discontinued real estate operations are two
parcels of real estate in California: the 105 acre Valley Gateway
property in the City of Santa Clarita and the 11 acre Via Verde Bluffs
property in the City of San Dimas. Management began an effort to sell
these properties in 1991. In 1994, the Company reported execution of
a contract for the sale of Via Verde Bluffs parcel for a minimum
purchase price of $2.8 million. This transaction did not close for
reasons other than price. The Company currently has this parcel under
option to a developer for $3.0 million.
In 1993, the Company suspended a development plan for the Valley
Gateway property, a former refinery site, due to the Company's limited
cash resources and poor market conditions in California. The Company
listed the Valley Gateway property with a broker for $5.0 million and
recorded additional loss provisions of $1.4 million for its
discontinued real estate operations during 1994. In September 1995,
following nearly two years of very little interest from serious buyers
and continued softening of local market conditions, the Company has
recorded further loss provisions of $4.3 million, reducing the value
of this property to $1.0 million. See Note 12 to the Consolidated
Financial Statements in Item 8.
Other
-----
Because of continuing losses and decreases in shareholders' equity,
the Company does not fully meet all of the guidelines of the American
Stock Exchange for continued listing of its shares. See Item 5,
Market For Registrant's Equity and Related Shareholder Matters.
Management has kept the Exchange fully informed regarding the
Company's present status and future plans. Although the Company does
not or may not meet all of the guidelines, to date, the American Stock
Exchange has chosen to allow the Company's shares to remain listed.
However, no assurances can be given that the Company's shares will
remain listed on the Exchange in the future.
The Company is subject to various federal, state and local
environmental laws and regulations. As is the case with other
companies engaged in oil and gas exploration, production and refining,
the Company faces exposure from actual or potential claims and
lawsuits involving environmental matters. These matters may involve
alleged soil and water contamination and air pollution. Future
environmental related expenditures cannot be reasonably quantified in
many circumstances due to the conjectural nature of remediation and
clean-up cost estimates and methods, the imprecise and conflicting
data regarding the characteristics of various types of waste, the
number of other potentially responsible parties involved and changing
environmental laws and interpretations. The reduced scope of the
Company's operations following the sale of the Company's domestic oil
and gas properties and the Fletcher refinery have significantly
reduced the Company's potential exposure to environmental liability.
25
The Company will continue to closely monitor and administer its
compliance with environmental matters. See Item 1 - Business, Other
Factors Affecting the Company's Business.
RESULTS OF OPERATIONS
Results of operations for the year ended September 30, 1995 amounted
to a loss of $11.9 million, or 90 cents per share, of which $6.9
million arose from continuing operations and $5.0 million resulted
from discontinued operations. The Company reported a net loss of
$11.0 million, or 85 cents per share, for the year ended September 30,
1994. The 1994 loss included discontinued loss provisions of $3.0
million and a loss of $8.0 million from continuing operations. In
1993, the Company reported a net loss of $23.8 million, or $1.83 per
share, which included losses from discontinued operations of $15.1
million and a loss of $8.7 million from continuing operations.
As described previously, the Company is in transition from a domestic
oil and gas operation to a foreign oil and gas operation. The
historical results of continuing operations contain many non-recurring
transactions. As a result, they are not comparable and are a poor
indicator of the Company's future operating results. Management
expects losses from continuing operations to continue until revenue
generation in Colombia commences, which is expected to occur no
earlier than the spring of 1997.
1995 vs 1994
------------
The decreases in operating revenues, other income, operating costs and
loss on sale of assets all arise primarily from non-recurring
transactions recorded in 1994.
The decrease in general and administrative expense of $0.5 million
between the years arises primarily from reductions in the number of
employees and insurance costs. Next year's corporate general and
administrative expense is not expected to vary significantly from
1995. However, the Company's share of overhead from the Opon
operation, which has been borne solely by Amoco Colombia during the
drilling of the Opon No. 3 and Opon No. 4 wells, is expected to add
significantly to general and administrative expense in 1996.
Exploration costs and exploratory dry holes had no significant
activity in 1994 but reflect the beginning of the seismic data
acquisition program in 1995. Significant expenditures for this
program are expected to be recognized in fiscal 1996.
Interest expense during 1995 and 1994 has been static. However, use
of the high-rate interim funding agreement (described in Liquidity and
Capital Resources) and capitalization of interest in relation to the
Company's development of the Colombian natural gas field will impact
reported interest expense for 1996. Variations in the timing of 1996
capital expenditures make it difficult to quantify whether interest
expense will increase or decrease in 1996.
26
1994 vs 1993
------------
Operating revenues, other income and operating costs are primarily
comprised of non-recurring transactions in both periods.
The decrease in general and administrative expense of $2.2 million
between the years arises primarily from reductions in the number of
employees, offices and aircraft. Costs of exploration and exploratory
dry holes include a charge of $1.0 million in 1993 for the write-off
of the Lilia No. 9, a shallow oil well in the Opon project. No
comparable expenses were incurred in 1994. Loss on sale of assets for
1994 includes $0.9 million from the sale of the Company's New Mexico
office facilities.
Total interest expense for 1994 of $4.6 million is less than total
interest expense for 1993 of $6.7 million. The net decrease of $2.1
million between the periods arises primarily from lower interest
rates, offset by an increase in outstanding debt of $9.3 million. The
amounts reported in the consolidated statements of operations
increased by $1.2 million because $3.3 million of interest was
allocated to discontinued operations in 1993.
Discontinued Operations
-----------------------
The Company implemented disposal accounting for its refining and
marketing and real estate segments during 1991. In 1995, the Company
recorded loss provisions of $0.7 million and $4.3 million for its
refining and marketing and real estate segments, respectively, as
described previously. Loss provisions for 1994 amounted to $2.0
million and $1.4 million for refining and marketing and real estate,
respectively. Results for the Company's discontinued operations in
1993 include loss provisions of $3.0 million and $5.7 million for the
refining and marketing and real estate operations, respectively, as
well as a loss of $6.4 million from the sale of substantially all of
the discontinued refining and marketing operations recorded in the
fourth quarter.
Operating losses from discontinued operations of $0.4 million, $0.4
million, and $11.7 million, for 1995, 1994, and 1993, respectively,
were charged against loss provisions established in earlier periods.
The Fletcher refinery was shut down in October 1992. A portion of the
refinery's storage capacity was used as a facility for storage and
distribution of crude oil and petroleum products belonging to third
parties during 1993. The refinery was sold in September 1993.
27
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1995, cash inflows of $4.8 million, $3.2 million, and
$2.0 million arose from the sale of assets, borrowings from Lonrho Plc
under existing loan agreements, and issuance of common stock as a
result of the exercise of stock options, respectively. The Company
utilized cash of $1.7 million and $0.5 million to finance continuing
and discontinued operations, respectively, $2.0 million for capital
expenditures, $5.0 million to reduce the balance of loans from Lonrho
Plc (see below), and made scheduled debt repayments of $0.2 million.
At September 30, 1995, the Company had cash balances of $1.8 million.
In December 1993, the Company restructured the terms of its debts to
Lonrho Plc. The revised terms included reduction of interest rates to
a fixed rate of 6% and provisions allowing the Company to offer
payment of future interest in shares of its common stock, and allowing
Lonrho Plc to either accept such payment in kind or add the amount of
the interest due to principal. The ability to pay interest in kind or
capitalize interest allows the Company to service its debt while cash
resources are scarce.
In October 1994, the Company received $4.8 million, net of withholding
taxes, from Amoco Colombia in accordance with the Farmout Agreement.
Also in October 1994, the Company paid $5.0 million to Lonrho Plc to
reduce the balance of outstanding loans from Lonrho Plc, and future
interest expense. At the same time, Lonrho Plc made available $5.0
million in the form of a facility loan that may be drawn as needed by
the Company. This facility loan was used in April 1995 to fund Hondo
Magdalena's $2.0 million contribution to the costs of drilling the
Opon No. 4 well and to finance other business activities. As of
September 30, 1995, $1.8 million of the facility loan is available for
future draws.
In December 1995, the Company obtained extensions of the maturity of
its debts to Lonrho Plc. The maturity of all loans from Lonrho Plc
was extended from not earlier than October 1, 1996 to not earlier than
October 1, 1997.
On May 5, 1995, Hondo Magdalena, ODC and Amoco Colombia entered into a
Funding Agreement for Tier I Development Project costs (the "Funding
Agreement") for the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area (see Note 7 to
the Consolidated Financial Statements in Item 8 and General
Discussion, Opon Exploration, above) and certain other costs related
to the Opon Contract. The Funding Agreement became effective on July
26, 1995 with the execution of the MOU. Hondo Magdalena may finance
its share of the costs (including overhead) for the pipeline and an
approved geological and geophysical work program for up to 365 days
after the date that production from the Opon Contract area begins.
The Funding Agreement provides that Hondo Magdalena may repay the
amounts financed from prior to the date of first production until 365
days thereafter, along with an equity premium computed on a 22%
annualized interest rate. The equity premium will be computed monthly
on Hondo Magdalena's share of expenditures (including any amounts to
be later recouped from Ecopetrol after commerciality). Alternatively,
28
from the date of first production until 90 days thereafter, Hondo
Magdalena may elect to repay 125% of its share (excluding any amounts
to be later recouped from Ecopetrol after commerciality) of the total
costs accumulated up to the date of repayment. If the financed
amounts are not repaid within 365 days after the date of first
production, an additional penalty of 100% of the amount then due would
be recovered out of Hondo Magdalena's revenues. Hondo Magdalena's
revenues from production of the first 80 million cubic feet of natural
gas and corresponding condensate and natural gas liquids are pledged
to secure its obligations under the Funding Agreement.
Based upon the Company's budget and current information, management
believes existing cash, available facilities, and the interim Funding
Agreement will be sufficient to finance the Company's known
obligations (the pipeline and related facilities, the seismic data
acquisition program, overhead obligations unrelated to capital
projects and other business activities) during fiscal 1996. However,
management believes the Company will need additional cash to
participate in the drilling of an additional well in Colombia, or to
participate in other capital projects which may be proposed in
Colombia. If the Company becomes obligated for the drilling of an
additional well, or other capital projects, the Company has the option
to not participate in some or all of the capital projects. In
management's view, use of this election would be a last resort to
preserve the Company's existing interest in the Opon Contract area
because substantial penalties would be incurred by not participating.
Cash from operations are not expected to be a source of funds until
the Opon Project begins commercial production. Over the past year,
management has held discussions with a number of financial
institutions regarding financing of the Company's future obligations
for the Opon project. In spite of successful completion of the Opon
No. 4 well and the preliminary sales commitments contained in the MOU,
additional debt or equity funds have not become available. Due to
recent changes in the status of the MOU, and in further development
plans, management now believes that permanent financing may not be
forthcoming until the economic uncertainties surrounding the Company's
ability to bring natural gas to market are resolved. While the
Company will continue to seek permanent financing in the near-term,
there can be no assurance that the Opon Project will be successfully
developed or that additional debt or equity funds will become
available.
29
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HONDO OIL & GAS COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors 31
Financial Statements:
Consolidated Balance Sheets as of
September 30, 1995 and 1994 32
Consolidated Statements of Operations for the years ended
September 30, 1995, 1994 and 1993 33
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended September 30, 1995, 1994 and 1993 34
Consolidated Statements of Cash Flows for the years ended
September 30, 1995, 1994 and 1993 35
Notes to Consolidated Financial Statements 36
30
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hondo Oil & Gas Company
Roswell, New Mexico
We have audited the accompanying consolidated balance sheets of Hondo Oil
& Gas Company as of September 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended September
30, 1995. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
As more fully described in Note 1, the Company has no significant
operating assets which are presently generating cash to fund its
operating and capital expenditure requirements. In addition, at
September 30, 1995, the Company had a deficiency in net assets. The
Company is participating with others in the development of an oil and
natural gas concession under the Opon Association Contract in Colombia,
which will require additional financing. The future of the Company is
largely dependent upon successful financing and exploitation of its
rights under this contract.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Hondo Oil & Gas Company at September 30, 1995 and 1994, and
the consolidated results of its operations and its cash flows for each of
the three years in the period ended September 30, 1995, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Denver, Colorado
December 22, 1995
</AUDIT-REPORT>
31
HONDO OIL & GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Information)
September 30,
1995 1994
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $1,771 $1,141
Accounts receivable (Notes 3 and 12) 440 5,477
Prepaid expenses and other 7 33
------------- -------------
Total current assets 2,218 6,651
Properties, net (Note 4) 12,777 10,855
Net assets of discontinued
operations (Note 12) 2,978 6,851
Other assets 425 551
------------- -------------
$18,398 $24,908
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $355 $196
Current portion of long-term debt (Note 6) 235 220
Accrued expenses and other (Note 5) 2,705 3,822
------------- -------------
Total current liabilities 3,295 4,238
Long-term debt, including $78,284 and
$77,755, respectively, payable to a
related party (Note 6) 82,213 81,888
Other liabilities, including $2,367 and
$2,354, respectively, payable to a
related party (Note 7) 6,254 5,463
------------- -------------
91,762 91,589
Contingent liabilities (Note 8)
Shareholders' equity (deficit) (Notes 6 and 9):
Preferred stock -- --
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 13,423,378 and
13,032,276, respectively 13,423 13,032
Additional paid-in capital 48,804 43,972
Accumulated deficit (135,591) (123,685)
------------- -------------
(73,364) (66,681)
------------- -------------
$18,398 $24,908
============= =============
The accompanying notes are an integral part of these financial statements.
32
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Data)
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Sales and operating revenue $23 $369 $145
Other income 21 359 835
------------- ------------- -------------
44 728 980
------------- ------------- -------------
COSTS AND EXPENSES
Operating costs 45 668 471
Depreciation, depletion, and amortization 266 220 365
General and administrative 1,727 2,210 4,427
Exploration costs and exploratory dry holes 169 2 1,012
Interest on indebtedness including $4,659,
$4,604 and $3,400, respectively, to a
related party (Note 6) 4,680 4,605 3,411
Loss on sale of assets -- 1,240 8
------------- ------------- -------------
6,887 8,945 9,694
------------- ------------- -------------
Loss from continuing operations before
income taxes (6,843) (8,217) (8,714)
Income tax expense (benefit) (Note 10) 113 (199) (46)
------------- ------------- -------------
Loss from continuing operations (6,956) (8,018) (8,668)
Loss from discontinued operations (Note 12) (4,950) (3,038) (15,176)
------------- ------------- -------------
Net Loss ($11,906) ($11,056) ($23,844)
============= ============= =============
Loss per share:
Continuing operations ($0.53) ($0.62) ($0.67)
Discontinued operations (0.37) (0.23) (1.16)
------------- ------------- -------------
Net loss per share ($0.90) ($0.85) ($1.83)
============= ============= =============
Weighted average common shares outstanding 13,171,049 13,009,174 13,006,967
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In Thousands Except Common Shares)
Common Stock Retained
----------------------------- Additional Earnings
Paid-In (Accumulated
Shares Amount Capital Deficit)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at October 1, 1992 13,006,892 $13,007 $43,807 ($88,785)
Net loss -- -- -- (23,844)
------------- ------------- ------------- -------------
Balance at September 30, 1993 13,006,892 13,007 43,807 (112,629)
Exercise of stock options (Note 10) 25,384 25 165 --
Net loss -- -- -- (11,056)
------------- ------------- ------------- -------------
Balance at September 30, 1994 13,032,276 13,032 43,972 (123,685)
Purchase of interest in Opon Association
Contract with common stock (Note 4) 44,438 44 845 --
Payment of interest with common stock
(Note 6) 189,080 189 2,104 --
Exercise of stock options (Note 9) 157,584 158 1,883 --
Net loss -- -- -- (11,906)
------------- ------------- ------------- -------------
Balance at September 30, 1995 13,423,378 $13,423 $48,804 ($135,591)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<TABLE>
<CAPTION>
HONDO OIL & GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Pretax loss from continuing operations ($6,843) ($8,217) ($8,714)
Adjustments to reconcile pretax loss from continuing
operations to net cash used by continuing operations:
Depreciation, depletion and amortization 266 220 365
Loss on sale of assets -- 1,240 8
Costs of exploratory dry holes -- -- 1,051
Accrued interest added to long-term debt 2,385 2,250 6,033
Accrued interest paid with common stock 2,292 -- --
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable 199 1,735 947
Inventory -- 770 (770)
Prepaid expenses and other 26 132 (284)
Other assets (201) 121 (71)
Increase (decrease) in:
Accounts payable 159 (1,675) (2,002)
Accrued expenses and other 123 (577) (3,417)
Other liabilities (82) 2,968 584
------------- ------------- -------------
Net cash used by continuing operations (1,676) (1,033) (6,270)
Net cash used by discontinued operations (473) (511) (9,482)
------------- ------------- -------------
Net cash used by operating activities (2,149) (1,544) (15,752)
------------- ------------- -------------
Cash flows from investing activities:
Sale of assets (Note 3) 4,804 1,971 3,714
Capital expenditures (2,021) (897) (13,588)
------------- ------------- -------------
Net cash provided (used) by investing activities 2,783 1,074 (9,874)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from long-term borrowings 3,175 1,000 6,000
Principal payments on long-term debt (5,220) (180) (248)
Issuance of stock 2,041 190 --
------------- ------------- -------------
Net cash provided (used) by financing activities (4) 1,010 5,752
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 630 540 (19,874)
Cash and cash equivalents at the beginning of the year 1,141 601 20,475
------------- ------------- -------------
Cash and cash equivalents at the end of the year $1,771 $1,141 $601
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
1) Nature of Business
------------------
Hondo Oil & Gas Company ("Hondo Oil" or "the Company") is an
independent oil and gas exploration and development company. The
Hondo Company presently owns 75.6% of Hondo Oil & Gas Company. Lonrho
Plc, an English company, owns 50% of The Hondo Company.
During 1991 the Company adopted plans of disposal for its refining
and marketing and real estate operations. Substantially all of the
refining and marketing assets were sold in 1993. Following the sale
of substantially all of its domestic oil and gas properties in 1992,
the Company's sole continuing business activity is exploitation of an
oil and gas concession in Colombia, South America.
The Company's wholly-owned subsidiary, Hondo Magdalena Oil & Gas
Limited ("Hondo Magdalena"), became involved in the Opon Association
Contract (the "Opon Contract") in Colombia in 1991. Amoco Colombia
Petroleum Company ("Amoco Colombia") earned an interest in the Opon
Contract through a Farmout Agreement executed in 1993. Amoco
Colombia, Hondo Magdalena, and Opon Development Company presently
have working interests of approximately 60%, 31%, and 9%,
respectively. The Colombian national oil company, Ecopetrol, has the
right to acquire 50% of the Opon Contract when commerciality is
declared and will reimburse the associate parties (out of future
production) for 50% of the direct exploration costs. Management
believes commerciality will be declared in the spring of 1996.
Amoco Colombia was obligated by the 1993 Farmout Agreement to fund
all but $2,000 of Hondo Magdalena's share of exploration costs during
the past two years and to make certain payments to Hondo Magdalena
(See Note 3). During that period, Amoco Colombia has spent
approximately $56,500 to drill two natural gas wells. The combined
results of production tests of these wells indicate they will produce
at a daily rate of 103 million cubic feet of natural gas and 3,900
barrels of condensate. The Company has not attributed proved
reserves to this discovery because economic factors of
transportation and marketing arrangements are not yet certain.
The parties to the Opon Contract have signed a Memorandum of
Understanding ("MOU") which provides for Ecopetrol's participation in
the construction of a pipeline and related wellhead facilities and
for execution of a contract for Ecopetrol to purchase, on a
take-or-pay-basis, 80 million cubic feet of natural gas per day for
three years and 40 million cubic feet of natural gas per day for a
subsequent twelve years. As more fully described in Note 7, Amoco
Colombia has agreed to finance the Company's share of costs to build
the pipeline, construct wellhead facilities, and acquire seismic
data, including overhead. However, new Colombian regulations
regarding ceilings on natural gas prices and pipeline tariffs have
raised doubt as to whether the pipeline and related contracts
contemplated in the MOU will be completed. Further, in December
1995, Amoco Colombia withdrew its proposed 1996 budget due to other
recent developments.
36
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
1) Nature of Business (continued)
------------------------------
Based upon the Company's budget and current information, management
believes existing cash, available facilities, and the interim Funding
Agreement (see Note 7) will be sufficient to finance the Company's
known obligations (the pipeline and related facilities, the seismic
data acquisition program, overhead obligations unrelated to capital
projects and other business activities) during fiscal 1996. If the
Company becomes obligated for the drilling of an additional well, or
other capital projects, the Company will need additional funds to
participate. The Company has the option to not participate in some
or all of the capital projects if it does not have sufficient funds.
However, substantial penalties would be incurred by not participating.
The Company's cash resources are presently limited to cash on hand
and advances under a line of credit from Lonrho Plc (See Note 6).
Cash from operations is not expected to be a source of funds unless
and until revenues from the Opon Contract commence. Management
estimates its available cash resources are sufficient to meet its
cash needs for the next fiscal year assuming no material adverse
changes to present plans occur. Due to the recent changes in the
activities contemplated in the MOU, and in development plans,
management now believes that permanent financing may not be
forthcoming until the economic uncertainties surrounding the
Company's ability to bring natural gas to market are resolved.
Obtaining permanent financing for development of the Company's Opon
project is vital to the Company's ability to successfully exploit
this concession in the future.
2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Consolidation and Presentation
---------------------------------------
The consolidated financial statements of Hondo Oil include the
accounts of all subsidiaries, all of which are wholly owned. All
significant intercompany transactions have been eliminated.
Effective March 31 and September 4, 1991, the Company adopted plans
of disposal for its refining and marketing and its real estate
segments, respectively. Accordingly, the results of operations and
the net assets of the discontinued segments have been reclassified to
discontinued operations for all periods presented. Assets of
discontinued operations are recorded at the lower of cost or net
realizable value. On October 1, 1993, the Company completed the sale
of substantially all of its refining and marketing assets. Refer to
Note 12.
37
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(b) Cash Equivalents
----------------
Cash equivalents represent highly liquid investments with original
maturities of three months or less.
(c) Oil and Gas Properties
----------------------
Oil and gas properties are accounted for using the successful efforts
method. Under this method, property acquisition costs are
capitalized when incurred. Exploratory geological and geophysical
costs and general and administrative costs, including salaries, are
expensed as incurred. The Company capitalizes interest expense for
individual capital projects requiring more than three months for
completion and costing more than $1,000. The costs of drilling
exploratory wells are capitalized pending determination of whether
the wells have found proved reserves. If proved reserves are not
discovered, such dry hole costs are expensed. All developmental
drilling costs, including intangible drilling and equipment costs
incurred on unsuccessful wells, are capitalized.
Acquisition costs of unproved properties which are considered to be
individually significant are periodically assessed for impairment on
a property-by-property basis. Individually insignificant properties
are assessed for impairment as a group. Any decline in value is
included in the statement of operations in exploration costs and
exploratory dry holes.
Intangible drilling and development costs and tangible equipment are
depleted by the units-of-production method using proved developed
reserves on a field basis. Leasehold costs are also depleted on a
field basis using total proved reserves. Estimates of proved
reserves are based upon reports of independent petroleum engineers.
(d) Other Fixed Assets
------------------
Other fixed assets are recorded at historical cost and are
depreciated by the straight-line method using useful lives of 7 to
10 years.
(e) Earnings Per Share
------------------
Net income per share amounts are computed using the weighted average
number of common shares and dilutive common equivalent shares
outstanding. The effect of common stock equivalents is not included
for periods with losses. Fully diluted per share amounts are the
same as primary per share amounts, and accordingly, are not presented.
38
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(f) Income Taxes
------------
As required by the provisions of SFAS No. 109, the Company changed
its method of accounting for income taxes from the provisions of SFAS
No. 96, "Accounting For Income Taxes", to the provisions of SFAS No.
109, "Accounting For Income Taxes", effective October 1, 1993. The
change in accounting method had no material effect on the Company's
financial position, results of operations, or components of income
tax expense for any period presented. Accordingly, no cumulative
effect of a change in accounting principle has been recognized.
Under Statement 109, the liability method is used in accounting for
income taxes. Deferred tax assets and liabilities are determined
based on reversals of differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted
effective tax rates and laws that will be in effect when the
differences are expected to reverse. Prior to the adoption of
Statement 109, income tax expense was determined using the liability
method prescribed by Statement 96, which has been superseded by
Statement 109. Among other changes, Statement 109 changes the
recognition and measurement criteria for deferred tax assets included
in Statement 96.
Investment tax credits are accounted for by the flow-through method
which recognizes related benefits in the year realized.
(g) Loan Fees
---------
Capitalized loan fees pertaining to long-term loans are included in
other assets. The loan fees are stated at cost and are amortized by
the straight-line method, which approximates the level yield method,
over the life of the related loan.
(h) Foreign Currency Translation
----------------------------
The Company's Colombian business is conducted in a highly
inflationary economic environment. Accordingly, the financial
statements of the Company's foreign subsidiary are remeasured as if
the functional currency were the U.S. dollar using historical
exchange rates. Exchange gains and losses, which have been
immaterial to date, are included in operating costs.
(i) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions, particularly in regard to discontinued operations,
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
39
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
2) Summary of Significant Accounting Policies (continued)
------------------------------------------------------
(j) New Accounting Standards
------------------------
In December 1991 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value of Financial Instruments". SFAS No.
107 requires disclosure of information relating to fair market values
of financial instruments and is effective for fiscal years ending
after December 15, 1995, for companies with total assets of less than
$150,000. Accordingly, the difference between fair market values and
carrying values of the Company's financial instruments has not been
determined.
In October 1995 the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and
reporting standards for stock-based employee compensation plans. The
standard is effective for fiscal years beginning after Decemeber 15,
1995 and will require disclosure of compensation expense for
stock-based compensation plans determined on a fair value based model.
3) Accounts Receivable
-------------------
Under the terms of the Farmout Agreement with Amoco Colombia (See
Note 1), Amoco Colombia had an option to withdraw from the Opon
Contract following completion of the Opon No. 3 well. On September
26, 1994, Amoco Colombia notified the Company it had elected to
proceed, and accordingly, incurred an obligation to the Company of
$5,000. The $5,000 receivable accrued by the Company at September
30, 1994 was collected on October 14, 1994. No gain was recognized
on the transaction, rather the full amount was used to reduce the
balance of the Company's drilling in progress.
The accounts receivable balances reported in the consolidated balance
sheets are net of allowances for doubtful receivables of $399 for
both September 30, 1995 and 1994, respectively.
40
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
4) Properties
----------
Properties, at cost, consist of the following:
September 30,
1995 1994
------------- -------------
Drilling in progress (Colombia) (a) $11,775 $10,696
Pipelines (Colombia) 873 --
Other fixed assets 279 267
Accumulated depreciation (150) (108)
------------- -------------
$12,777 $10,855
============= =============
(a) As of September 30, 1995, drilling in progress represents the
Company's investment in oil and gas properties in Colombia.
This investment will be classified as a proved oil and gas
property if and when economic factors regarding transportation
and marketing arrangements are resolved.
Total costs incurred (both capitalized and expensed) in Colombia for
oil and gas producing activities were:
<TABLE>
<HEADING>
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Property acquisition costs (a) $889 $-- $536
============= ============= =============
Exploration costs $169 $2,068 $7,184
============= ============= =============
Development costs $190 $-- --
============= ============= =============
</TABLE>
(a) In September 1995, the Company acquired an additional 0.88875%
interest in the Opon Contract by the issuance of 44,438 shares
of its common stock.
41
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
5) Accrued expenses
----------------
Accrued expenses consist of the following:
September 30,
1995 1994
------------- -------------
Refining and marketing costs (Note 12) $2,114 $1,544
Drilling costs 190 2,000
Other 401 278
------------- -------------
$2,705 $3,822
============= =============
6) Long-Term Debt
--------------
Long-term debt consists of the following:
September 30,
1995 1994
------------- -------------
Notes payable to Lonrho Plc (a),(b):
Note A (c) $3,277 $3,181
Note B (c) 4,271 4,144
Note C (d) 36,361 35,302
Note D (d),(e) 34,375 35,128
Pollution Control Revenue Bonds (f) 2,710 2,930
Industrial Development Revenue Bonds (f) 1,000 1,000
Other 454 423
------------- -------------
82,448 82,108
Less current maturities (235) (220)
------------- -------------
$82,213 $81,888
============= =============
Maturities are as follows for the years ending September 30:
1996 $235
1997 704
1998 54,330
1999 19,969
2000 1,804
Thereafter 5,406
-------------
$82,448
=============
Hondo Oil paid interest of $248, $260 and $4,031 for the years ended
September 30, 1995, 1994 and 1993, respectively. Interest of $829,
all of which pertained to discontinued operations and arose from
amounts owed to Lonrho Plc, was capitalized for the year ended
September 30, 1993.
42
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
6) Long-Term Debt (continued)
--------------------------
(a) The following terms apply to each of the four notes:
(1) Interest is payable semiannually at a rate of 6%.
(2) If management determines sufficent cash is not available
to pay interest, management may offer to issue the Company's
unregistered stock valued at the American Stock Exchange
closing price on the interest due date as payment in kind.
Lonrho may choose to either add the accrued interest to the
balance of the debt outstanding or accept the payment in kind.
(3) Accrued interest of $2,354, $2,250 and $6,005 has been
added to the outstanding debt as of October 1, 1994, April 1,
1994 and September 30, 1993, respectively. Accrued interest
of $2,367 and $2,293 has been paid by the issuance of 121,372
and 189,080 shares, respectively, of the Company's common
stock for amounts due on October 1, 1995 and April 1, 1995,
respectively.
(4) As consideration for past deferrals of interest and
principal payments due under the terms of the four notes, the
Company has granted Lonrho Plc a 5% share of the Company's net
profits, as defined, under the Opon Contract. Following
repayment of the four notes, Lonrho's entitlement will be
reduced by half.
(5) Net proceeds from asset sales are to be applied to the
reduction of Notes C and D.
(b) On December 22, 1995, the Company and Lonrho agreed to defer
commencement of principal amortization for each of the four
loans. The maturity terms noted below reflect the revisions.
(c) Notes A and B are secured by the Company's real estate
included in discontinued operations. Absent repayment in full
as a result of the sale of the securing real estate, principal
amortization in ten equal semiannual installments will
commence October 1, 1997. Note A is secured by the Company's
Via Verde Bluffs real estate. Note B is secured by the
Company's Valley Gateway real estate. An additional $1,000
was drawn under the terms of Note B during 1994.
(d) Notes C and D are secured by the Company's Valley Gateway real
estate. Note C is to be amortized in two equal annual
installments beginning November 1, 1997. Note D is due
October 1, 1997. Notes C and D are subordinated to the
Company's other indebtedness existing at September 30, 1995.
(e) In October 1994, the Company received $4,800, net of
withholding taxes, from Amoco Colombia under the terms of the
Farmout Agreement (See Notes 1 and 3). Also in October 1994,
the Company paid $5,000 to Lonrho Plc to reduce the balance of
Note D and the related interest expense. At the same time,
Lonrho Plc made available $5,000 in the form of a facility
loan that may be drawn as needed by the Company. The Company
drew $3,175 of this facility loan during 1995.
43
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
6) Long-Term Debt (continued)
--------------------------
(f) Both issues of these tax-exempt bonds were issued under the
authority of the California Pollution Control Financing
Authority. The Pollution Control Revenue bonds bear interest
at an average rate of 6.12%, payable semiannually, and mature
serially through November 1, 2003. The Industrial
Development Revenue Bonds bear interest at a rate of 7.5%,
payable semiannually, and mature September 1, 2011. Both bond
issues are collateralized by certain refinery facilities and
equipment located at Valley Gateway and the Fletcher refinery.
The collateral at the Fletcher refinery is leased to the buyer
for a nominal annual fee. The trustee of the bonds was
notified of changes to the collateral in 1993 and the trustee
has not taken any action to declare a breach of covenant or a
default. The Company routinely communicates with the Trustee
and has received no indication that the Trustee is
contemplating any such action.
According to the terms of the various credit agreements, the Company
is restricted in its ability to: (a) incur additional debt; and (b)
pay dividends on and/or redeem capital stock.
7) Other Liabilities
-----------------
Other liabilities consist of the following:
September 30,
1995 1994
------------- -------------
Interest payable to Lonrho Plc (Note 6) $2,367 $2,354
Funding Agreement - Amoco Colombia (a) 1,148 --
Deferred compensation contracts (b) 671 625
City of Long Beach 1,533 1,533
Other 535 951
------------- -------------
$6,254 $5,463
============= =============
(a) Effective July 26, 1995, Hondo Magdalena, Amoco Colombia, and
Opon Development Company entered into a Funding Agreement for
Tier I Development Project costs (the "Funding Agreement") for
the interim financing of costs associated with the
construction of a pipeline from the Opon Contract area and for
an approved geological and geophysical work program. The
Funding Agreement provides that Hondo Magdalena may repay the
amounts financed by Amoco Colombia from prior to the date of
first production until 365 days thereafter, along with an
equity premium computed using a 22% annualized interest rate.
The equity premium will be computed monthly on Hondo
Magdalena's share of expenditures (including any amounts to be
recouped from Ecopetrol after commerciality).
44
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
7) Other Liabilities (continued)
-----------------------------
(a) (continued)
Alternatively, from the date of first production until 90 days
thereafter, Hondo Magdalena may elect to repay 125% of its
share (excluding any amounts to be recouped from
Ecopetrol after commerciality) of the total costs accumulated
up to the date of repayment. If the financed amounts are not
repaid within 365 days after the date of first production, an
additional penalty of 100% of the amount then due would be
recovered out of Hondo Magdalena's revenues. Hondo
Magdalena's revenues from production of the first 80 million
cubic feet of natural gas and related condensate and natural
gas liquids are pledged to secure its obligations under the
Funding Agreement. Equity premiums of $57 have been
capitalized for the year ended September 30, 1995.
(b) The Company has deferred compensation contracts with two
former officers of the Company. The contracts were entered
into to provide benefits greater than the amounts allowable
(in accordance with IRS regulations) under a former defined
benefit plan available to all employees (terminated in 1989).
The amounts above represent the actuarial present value of the
Company's liability under the contracts computed with a 7.5%
discount rate for both years.
8) Contingent liabilities
----------------------
The Company is involved in a number of legal and administrative
proceedings incident to the ordinary course of its business. In the
opinion of management, any liability to the Company relative to the
various proceedings will not have a material adverse effect on the
Company's operations or financial condition.
The Company is subject to various environmental laws and regulations
of the United States. As is the case with other companies engaged in
similar industries, the Company faces exposure from actual or
potential claims and lawsuits involving environmental matters. These
matters may involve alleged soil and water contamination and air
pollution. The Company's policy is to accrue environmental and
clean-up costs when it is probable that a liability has been incurred
and the amount of the liability is reasonably estimable. However,
future environmental related expenditures cannot be reasonably
quantified in many circumstances due to the conjectural nature of
remediation and clean-up cost estimates and methods, the imprecise
and conflicting data regarding the characteristics of various types
of waste, the number of other potentially responsible parties
involved, and changing environmental laws and interpretations. The
reduced scope of the Company's operations following the sale of the
Company's domestic oil and gas properties and the Fletcher refinery
have significantly reduced the Company's potential exposure to
environmental liability, including potential Superfund claims against
Fletcher, which liability, in the opinion of management, is not
material.
45
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
9) Shareholders' Equity
--------------------
In addition to its common shares, the Company has authorized
10,000,000 shares of one dollar par value preferred stock. No
preferred shares have been issued as of September 30, 1995.
The Company has two stock option plans under which options to
purchase common shares of the Company are granted to certain
officers, directors and key employees. The options are priced equal
to or greater than the market price in effect at the date of grant.
Accordingly, no compensation expense in connection with these plans
is recognized. The 1982 Stock Option Plan has been terminated except
for 74,700 options priced at $19.00 per share which were exercised in
1995. The balance of options exercised in 1995 were priced at $7.50.
The Company granted an option for 25,000 shares at $7.50 per share to
a former officer in March 1995. The option was not granted under the
1993 Stock Incentive Plan as it was priced less than the market price
at date of grant. Compensation of $138 was included in general and
administrative expense at the date of grant.
The following table summarizes certain information relative to
stock options outstanding:
Share
Options
-------------
Outstanding at October 1, 1994 220,316
Granted 125,000
Exercised (157,584)
Expired or terminated --
-------------
Outstanding at September 30, 1995 (a) 187,732
=============
(a) Includes 87,732, 85,000, and 15,000 options priced at $7.50,
$14.625, and $12.625, respectively; 137,732 options are
exercisable at September 30, 1995.
As of September 30, 1995 and 1994 additional options of 79,000 and
179,000, respectively, were available for future grants under the
1993 Stock Incentive Plan.
A total of 233,518 shares of common stock were issued during 1995 in
transactions not involving stock options. See Notes 4 and 6.
46
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
10) Income Taxes
------------
The components of income tax expense (benefit) from continuing
operations are as follows:
<TABLE>
<HEADING>
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Foreign $113 -- --
Deferred:
Federal -- ($190) ($30)
State -- (9) (16)
------------- ------------- -------------
$113 ($199) ($46)
============= ============= =============
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are as follows:
September 30,
1995 1994
------------- -------------
Deferred tax assets, long-term:
Foreign income tax basis of
capitalized assets in excess of
financial reporting basis $1,355 --
Income tax basis of real estate in
excess of financial reporting basis 1,654
Domestic net operating loss
carryforwards 42,739 $38,734
Valuation allowances (44,542) (38,734)
------------- -------------
1,206 --
------------- -------------
Deferred tax liabilities, long-term:
Foreign income tax depreciation in
excess of financial reporting
depreciation 1,206 --
------------- -------------
1,206 --
------------- -------------
Net deferred tax liability $-- $--
============= =============
47
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
10) Income Taxes (continued)
------------------------
The differences between income tax expense (benefit) from continuing
operations and the amount computed by applying the statutory Federal
income tax rate to loss from continuing operations before income
taxes are as follows:
<TABLE>
<HEADING>
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Benefit computed at the effective
statutory rate ($2,365) ($2,794) ($2,963)
Reduction of future reversals by
utilization of net operating loss
carryforwards -- 93 --
State taxes, net -- (9) (16)
Alternative minimum tax -- (190) (30)
Losses from foreign operations 215 137 482
Foreign income tax expense 113 -- --
Net operating loss for which no benefit
is recognized 2,150 2,564 2,481
------------- ------------- -------------
$113 ($199) ($46)
============= ============= =============
</TABLE>
48
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
10) Income Taxes (continued)
------------------------
At September 30, 1995, the Company had the following domestic net
operating loss and investment tax credit carryforwards for financial
statement and income tax reporting purposes:
<TABLE>
<HEADING>
Alternative
Tax Net Minimum Net Investment
Operating Tax Operating Tax
Year of Expiration Loss Loss Credit
------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Consolidated Carryforwards:
2003 $3,167 --
2004 12,469 $10,917
2005 2,803 --
2006 26,612 22,012
2007 15,781 30,041
2008 25,551 23,919
2009 13,115 14,517
2010 8,620 8,620
------------- -------------
$108,118 $110,026
============= =============
Separate Carryforwards (a)
1996 -- -- $612
1997 -- -- 259
1998 -- -- 144
1999 -- -- 210
2000 $12,397 $12,397 74
2002 6,101 6,101 --
2003 6,714 10,715 --
------------- ------------- -------------
$25,212 $29,213 $1,299
============= ============= =============
</TABLE>
(a) These separate carryforwards can only be used against future
income and tax liabilities of the company within the
consolidated group which generated the carryforwards.
In conjunction with the sale of the Fletcher refinery in 1993 as
described in Note 12, unrestricted net operating loss carryforwards of
$59,658 and separate net operating loss carryforwards of $23,983
pertaining to the Fletcher refinery were reattributed to Hondo Oil.
49
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
11) Segment information
-------------------
Following reclassification of the Company's refining and marketing
and real estate segments to discontinued operations in 1991, the
Company's operations have been concentrated in one industry segment:
the exploration for and production of reserves of oil and natural
gas. In 1992, the Company sold substantially all of its domestic oil
and gas reserves. The Company's continuing activities are presently
limited to exploration for oil and gas reserves located in Colombia.
The Company has no foreign sales and no export sales as yet. The
Company has no significant customers (comprising more than 10% of
continuing operation's revenue) with which it will do business in the
foreseeable future. Information segregating the Company's continuing
domestic and foreign operations is as follows:
<TABLE>
<HEADING>
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Sales and operating revenue:
United States $23 $369 $145
Foreign -- -- --
------------- ------------- -------------
$23 $369 $145
============= ============= =============
Operating profit (loss):
United States ($140) $155 ($728)
Foreign (207) (283) (1,434)
------------- ------------- -------------
Operating loss (347) (128) (2,162)
Loss on sale of assets -- (1,240) (8)
Interest expense (4,680) (4,605) (3,411)
Corporate expense and other (1,816) (2,244) (3,133)
------------- ------------- -------------
Loss from continuing operations
before income taxes ($6,843) ($8,217) ($8,714)
============= ============= =============
Identifiable assets:
United States $5,645 $9,175 $15,637
Foreign 12,753 15,733 14,505
------------- ------------- -------------
$18,398 $24,908 $30,142
============= ============= =============
</TABLE>
50
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
12) Discontinued Operations
-----------------------
Effective March 31 and September 4, 1991, respectively, the Company
adopted plans of disposal for its refining and marketing and real
estate segments. Revenues of the refining and marketing segment for
1995, 1994 and 1993 were $0, $64 and $1,213, respectively. A
summary, by segment, of the results of discontinued operations is as
follows:
<TABLE>
<HEADING>
For the years ended
---------------------------------------------
September 30,
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Refining and marketing ($650) ($2,000) ($9,370)
Real estate (4,300) (1,400) (5,700)
Income tax expense (benefit) -- (362) 106
------------- ------------- -------------
($4,950) ($3,038) ($15,176)
============= ============= =============
Per share ($0.37) ($0.23) ($1.16)
============= ============= =============
</TABLE>
In September 1993, the Company executed an agreement for the sale of
its Fletcher refinery and its asphalt terminal in Hilo, Hawaii.
These assets represent the material portion of the Company's refining
and marketing segment. The transaction closed on October 1, 1993 at
which time $992 of the net accrued proceeds of $1,992 were received.
Refining and marketing losses for 1993 include $6,370 resulting from
the sale and operating loss provisions of $3,000. Additional loss
provisions of $650 and $2,000 have been required in 1995 and 1994 for
reasons described below.
The agreement for the sale of Fletcher included a provision allowing
the Company to share in the proceeds from the sale of certain
components of the refinery equipment which the buyer planned to sell.
Based on estimates of a broker of used refinery equipment, the
Company recorded $1,000 as the estimated realizable value at the time
of the transaction. The buyer and the Company have not succeeded in
selling this equipment during the ensuing two years. In September
1994, the Company reduced the carrying value of the receivable by
$600 on the basis of an offer from the buyer for the Company's share
of equipment sale proceeds.
51
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In the agreement for the sale of the Fletcher refinery, the Company
indemnified the buyer as to liabilities in excess of $300 for certain
federal and state excise taxes arising from periods prior to the
sale. Fletcher notified the Company in July 1994 that an audit for
California Motor Vehicle Fuels Tax was underway and a preliminary
review by present Fletcher employees indicated that a significant
liability might exist. The Company retained a consultant to evaluate
the contingent liability. In September 1994, the Company accrued
$1,400 as a result of the consultant's evaluation. An additional
$650 was accrued in September 1995, primarily because of increases in
the estimated amounts of penalties and interest which will be due.
The State of California's audit is still in process and could result
in a liability different from the amount accrued when concluded.
On December 15, 1989, the Company permanently suspended operations at
its Newhall refinery because of expectations of continued operating
losses. As of September 30, 1990, the Company reclassified the cost
of Newhall's dismantled properties to the real estate segment. All
costs incurred subsequent to December 15, 1989 have been charged
against previously established loss provisions. In September 1993,
the Company suspended execution of a development plan for the
property, now referred to as Valley Gateway, which included
dismantling the refinery, effecting environmental remediation of the
land and further developing the land to a condition where it could be
sold as land ready for construction. This decision was made as a
result of continued declines in the local real estate market and the
Company's limited cash resources. Management now believes that a
sale of the property in its present condition with existing
entitlements is the best course of action. The carrying value of the
property was reduced by $5,700 in 1993 as a result of this decision.
52
HONDO OIL & GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(All Dollar Amounts in Thousands)
12) Discontinued Operations (continued)
-----------------------------------
In addition to the Valley Gateway property, the Company owns the 11
acre Via Verde Bluffs property, carried at $2,528 and $2,575 at
September 30, 1995 and 1994, respectively. Both properties have been
listed with brokers since 1994.
In 1995 and 1994, the carrying value of the real estate has been
further reduced by $4,300 ($4,000 in September 1995) and $1,400,
respectively, as a result of depressed demand in the local market,
sale negotiations, and the timing of possible sales.
Changes in the balance of real estate are as follows:
September 30,
1995 1994
------------- -------------
Beginning balance $6,851 $7,750
Development and dismantlement costs -- 168
Valuation provisions established (4,300) (1,400)
Valuation provisions used 427 333
------------- -------------
Ending balance $2,978 $6,851
============= =============
Remaining acres 116 116
============= =============
Interest expense included in the losses from discontinued operations
pertains only to debt directly attributable to the discontinued
segments. Interest of expense $2,522 for 1993, attributable to
Lonrho Plc, was allocated to refining and marketing operations.
Allocations of interest to the real estate operations were $274, $285
and $295 for 1995, 1994 and 1993 respectively.
53
<TABLE>
<HEADING>
HONDO OIL & GAS COMPANY
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
September 30, 1995
(All Dollar Amounts in Thousands)
Additions
Balance at charged to Balance
beginning costs and at end
of period expenses Write-offs of period
------------- ------------- ------------- -------------
Allowance for doubtful receivables:
<S> <C> <C> <C> <C>
Continuing operations:
1995 $399 $-- $-- $399
============= ============= ============= =============
1994 $555 $61 ($217) $399
============= ============= ============= =============
1993 $812 $156 ($413) $555
============= ============= ============= =============
Discontinued operations:
1995 $-- $-- $-- $--
============= ============= ============= =============
1994 $-- $-- $-- $--
============= ============= ============= =============
1993 $1,078 $-- ($856) $222
============= ============= ============= =============
</TABLE>
Note: The balance of $222 for discontinued operations as of September
30, 1993 was included in the assets of a subsidiary which was
sold as of that date.
54
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no change in the Company's auditors during the two most
recent fiscal years.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the Company's
Proxy Statement to be filed within 120 days after fiscal year end and is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's
Proxy Statement to be filed within 120 days after fiscal year end and is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the Company's
Proxy Statement to be filed within 120 days after fiscal year end and is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's
Proxy Statement to be filed within 120 days after fiscal year end and is
incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See the Index to Financial Statements
in Item 8 hereof.
(2) Financial Statement Schedules: Page
II. Valuation and Qualifying Accounts 54
Schedules other than those listed above are omitted because
they are not required or not applicable, or because the
information required in a schedule is otherwise included in
the Notes to Consolidated Financial Statements.
(3) Exhibits filed with this report: See Item (c) below.
55
(b) Reports on Form 8-K:
The Company filed two Forms 8-K during the quarter ended September
30, 1995, dated August 18, 1995 and August 28, 1995. The first
reported a delay for reporting the results of the Opon No. 4 well
from August to October due to mechanical problems with the well. The
second reported the proposal of a downstream merger by the Company's
majority shareholder, The Hondo Company.
(c) Exhibits: See Exhibit Index on page 58 for exhibits required by Item
601 of Regulation S-K.
(d) Financial statement schedules required by Regulation S-X which are
excluded from the annual report to shareholders by Rule 14a-3 (b)(1):
See Item (a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report on Form
10-K for the year ended September 30, 1995 to be signed on its behalf by
the undersigned, thereunto duly authorized.
HONDO OIL & GAS COMPANY
Date: December 28, 1995 By:/s/Stanton J. Urquhart
-----------------------
Stanton J. Urquhart
Vice President
(continued)
56
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K for the year ended September 30, 1995 has been signed
below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<HEADING>
Signature Title Date
-------------------------------------- ----------------------------- ----------------
<S> <C> <C>
/s/ Robert O. Anderson Chairman of the Board, December 28, 1995
-------------------------------------- Director
ROBERT O. ANDERSON
/s/ Dieter Bock Director December 28, 1995
--------------------------------------
DIETER BOCK
/s/ John J. Hoey President, Chief Executive December 28, 1995
-------------------------------------- Officer, and Director
JOHN J. HOEY
/s/ C.B. McDaniel Secretary, Director December 28, 1995
--------------------------------------
C.B. MCDANIEL
/s/ Douglas G. McNair Director December 28, 1995
--------------------------------------
DOUGLAS G. MCNAIR
/s/ John F. Price Director December 28, 1995
--------------------------------------
JOHN F. PRICE
Director
--------------------------------------
R.W. ROWLAND
/s/ Robert K. Steer Director December 28, 1995
--------------------------------------
ROBERT K. STEER
/s/ R.E. Whitten Director December 28, 1995
--------------------------------------
R.E. WHITTEN
/s/ Stanton J. Urquhart Vice President, Principal December 28, 1995
-------------------------------------- Financial and Principal
STANTON J. URQUHART Accounting Officer
</TABLE>
57
EXHIBIT INDEX
Exhibit
Number Subject
------- ---------------------------------------------------------------
3.1 Restated Certificate of Incorporation.
3.2 Bylaws, as amended on September 5, 1995.
*4.1 Documents relating to the $1 million principal amount of
California Pollution Control Authority, 7 1/2% Industrial
Development Revenue Bonds (Newhall Refining Co., Inc. Project)
including Installment Sale Agreement and Indenture of Trust.
*4.2 Documents relating to the $5 million principal amount of
California Pollution Control Financing Authority Pollution
Control Revenue Bonds (Newhall Refining Co., Inc. Project),
including Pollution Control Facilities Lease Agreement,
Indenture, U.S. Small Business Administration Pollution
Control Facility Payment Guaranty and Reimbursement Agreement.
*10.1 Note Purchase Agreement and Letter Agreement dated November
28, 1988, between the Company and Thamesedge, Ltd.
**10.2 Letter Agreement dated December 18, 1992, between the Company
and Thamesedge, Ltd., amending Note Purchase Agreement
(Exhibit 10.1, above) (incorporated by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1992, filed with the
Securities and Exchange Commission on December 28, 1992).
**10.3 Loan Agreement dated December 20, 1991, by and between Hondo
Oil & Gas Company and Lonrho Plc, including the Promissory
Notes and Letter Agreement related thereto (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1991, filed
with the Securities and Exchange Commission on January 13,
1992).
**10.4 Letter Agreement dated December 18, 1992, between the Company
and Lonrho Plc, amending Loan Agreement (Exhibit 10.3, above)
(incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1992, filed with the Securities and Exchange Commission on
December 28, 1992).
**10.5 Net Profits Share Agreement dated December 18, 1992, among the
Company, Lonrho Plc, Thamesedge, Ltd. (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992, filed
with the Securities and Exchange Commission on December 28,
1992).
58
EXHIBIT INDEX (continued)
Exhibit
Number Subject
------- ---------------------------------------------------------------
**10.6 Note Dated April 30, 1993, for $3,000,000, from Via Verde
Development Company to Lonrho Plc; Guaranty of the Company
(incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1993, filed with the Securities and Exchange Commission on May
17, 1993).
**10.7 Note dated June 25, 1993 for $4,000,000 from the Company to
Lonrho Plc; Letter Agreement relating to same (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993, filed
with the Securities and Exchange Commission on December 28,
1993).
**10.8 Letter Agreement dated December 17, 1993, by and among the
Company, Via Verde Development Company, Newhall Refining Co.,
Inc., Lonrho Plc and Thamesedge Ltd. and Note Amendments,
amending prior loan agreements and notes (Exhibits 10.1 through
10.7, above),(incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, filed with the Securities and
Exchange Commission on December 28, 1993).
**10.9 Letter Agreement dated November 10, 1994, by and among the
Company, Via Verde Development Company, Newhall Refining Co.,
Inc., Lonrho Plc and Thamesedge Ltd. and Note Amendments
(excluding Exhibit E to the Letter Agreement filed as Exhibit
10.10, below) amending prior loan agreements and notes
(Exhibits 10.1 through 10.8, above),(incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated November 29, 1994, filed with the Securities and
Exchange Commission on November 29, 1994).
**10.10 Promissory Note dated October 31, 1994, in the original
principal amount of $5,000,000, from the Company to Lonrho Plc
(additional loan facility),(incorporated by reference to
Exhibit 10.2 to the Company's Report on Form 8-K dated
November 29, 1994, filed with the Securities and Exchange
Commission on November 29, 1994).
10.11 Letter Agreement dated December 22, 1995, by and among the
Company, Via Verde Development Company, Newhall Refining Co.,
Inc., Lonrho Plc and Thamesedge Ltd. and Note Amendments
amending prior loan agreements and notes (Exhibits 10.1
through 10.10, above).
*10.12 Employee Capital Appreciation Savings Plan, effective January
1, 1985.
**10.13 Form of Indemnity Agreement between Pauley and its directors
and officers, approved January 27, 1987 (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992, filed
with the Securities and Exchange Commission on December 28,
1992).
59
EXHIBIT INDEX (continued)
Exhibit
Number Subject
------- ---------------------------------------------------------------
**10.14 Opon Association Contract (translation) dated July 15, 1987,
between Ecopetrol and Opon Development Company, excluding
exhibits and attachments (incorporated by reference to Exhibit
10.22 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1991, filed with Securities
and Exchange Commission on January 13, 1992).
**10.15 Farmout Agreement dated August 9, 1993, among Hondo Magdalena
Oil & Gas Limited, Opon Development Company and Amoco Colombia
Petroleum Company, excluding exhibits (incorporated by
reference to Exhibit 19.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993, filed with the
Securities and Exchange Commission on August 16, 1993).
**10.16 New Operating Agreement dated as of August 9, 1993, among
Hondo Magdalena Oil & Gas Limited, Amoco Colombia Petroleum
Company, and Opon Development Company (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993, filed
with Securities and Exchange Commission on December 28, 1993).
**10.17 Stock and Asset Purchase Agreement dated September 15, 1993,
between Signal Oil & Refining Company, Inc. and the Company
and Pauley Pacific Inc., excluding exhibits (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on
Form 8- K dated October 12, 1993, filed with the Securities
and Exchange Commission on October 12, 1993).
**10.18 Letter Agreement dated February 2, 1994 between the Company
and the City of Long Beach, excluding exhibits (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1993, filed
with the Securities and Exchange Commission on February 14,
1994).
**10.19 Hondo Oil & Gas Company 1993 Stock Incentive Plan, excluding
exhibits (incorporated by reference to Exhibit A to the
Company's Proxy Statement on Schedule 14A filed with the
Securities and Exchange Commission on January 28, 1994).
**10.20 Funding Agreement for Tier 1 Development Project dated May 5,
1995, among Hondo Magdalena Oil & Gas Limited, Amoco Colombia
Petroleum Company and Opon Development Company, excluding
exhibits (except exhibit A) (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, filed with the Securities
and Exchange Commission on July 28, 1995).
**10.21 Memorandum of Understanding (translation) dated July 26, 1995,
among Hondo Magdalena Oil & Gas Limited, Amoco Colombia
Petroleum Company, Opon Development Company, and Empresa
Colombiana de Petroleos, excluding exhibits (except Exhibit A)
(incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, filed with the Securities and Exchange Commission on
July 28, 1995).
60
EXHIBIT INDEX (continued)
Exhibit
Number Subject
------- ---------------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedules.
--------------------------------------
* These exhibits, which were previously incorporated by reference to the
Company's reports which have now been on file with the Commission for
more than 5 years, are not filed with this Annual Report pursuant to
17 C.F.R. 229.601(b)(4)(iii)(A). The Company agrees to furnish these
documents to the Commission upon request.
** Incorporated by reference
61
RESTATED CERTIFICATE OF INCORPORATION OF
HONDO OIL & GAS COMPANY
Hondo Oil & Gas Company, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of corporation is Hondo Oil & Gas Company and the name under
which the corporation was originally incorporated is Pauley Petroleum
Inc. The date of filing of its original Certificate of Incorporation
was June 2, 1958.
2. This Restated Certificate of Incorporation only restates and
integrates and does not further amend the provisions of the
Certificate of Incorporation of this corporation as heretofore amended
or supplemented; there is no discrepancy between those provisions and
the provisions of this Restated Certificate of Incorporation. The
restatement of the articles of incorporation does not contain an
amendment of the articles of incorporation that requires shareholder
approval.
3. The text of the Certificate of Incorporation as amended or
supplemented heretofore is hereby restated, without further amendments
or changes, to read as set forth in Exhibit A hereto.
4. This Restated Certificate of Incorporation was duly adopted by the
Board of Directors of the corporation in accordance with Section 245
of the Delaware General Corporation Law.
Dated: November 10, 1994 Hondo Oil & Gas Company
By:/s/ John J. Hoey
--------------------------
John J. Hoey
President and Chief Executive Officer
By:/s/ C.B. McDaniel
---------------------------
C.B. McDaniel
Secretary
Exhibit A
RESTATED
CERTIFICATE OF INCORPORATION
OF
HONDO OIL & GAS COMPANY
FIRST: The name of the corporation is Hondo Oil & Gas Company.
SECOND: Its principal office in the State of Delaware is located at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.
The name and address of its resident agent is The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801.
THIRD: The nature of the business, or objects or purposes to be
transacted, promoted or carried on are:
To purchase, or otherwise acquire or invest in, own, mortgage,
pledge, sell, assign, transfer, or otherwise dispose of, in whole or
in part, oil, gas and mineral leases; oil, gas and mineral
concessions, rights or interests granted or created by any government
or any subdivision thereof; oil, gas and mineral rights; any interest
of any type in any of the foregoing, including expressly interests
known as oil payments, gas payments and production payments; fee
lands; mineral interests in lands; mining claims; applications or
options to acquire oil, gas or mineral leases, concessions or rights;
royalty interests; overriding royalty interests; net profits interests
and any other interest in lands or any rights or interests created by
contract or otherwise which entitle the owner or owners thereof to
participate in any way in, or obtain any advantage from, the
production or sale of oil, gas or other minerals.
To operate, maintain, improve and develop oil, gas or other
mineral properties, to explore for oil, gas or other minerals by any
means, including the drilling of wells for such purposes, and to
purchase and sell oil, gas or other minerals and all products and by-
products thereof.
To enter into, maintain, operate or carry on in any or all of its
branches the business of exploring for, producing, developing, mining,
processing, refining, treating, handling, marketing or dealing in,
petroleum, oil, natural gas, asphalt, bituminous rock and any and all
other mineral and hydrocarbon substances, and any and all products or
by-products which may be derived from such substances, or any of them;
and for all or any of such purposes to acquire, own, lease, operate or
otherwise deal in or with oil or gas wells, tanks, storage facilities,
gathering systems, pipelines, processing plants, mines, refineries,
smelters, crushers, mills, wharves, watercraft, aircraft, tank cars,
communication systems, machinery, equipment and any and all other
kinds and types of real or personal property that may in anywise be
1
deemed necessary, convenient or advisable in connection with the
carrying on of such business or any branch thereof.
To acquire, own, store, transport, buy and sell salt brine and
other mineral solutions and sand and clay for the manufacture and sale
of clay products.
To buy, exchange, contract for, lease, and in any and all other
ways, acquire, take, hold and own, and to deal in, sell, mortgage,
lease or otherwise dispose of real property, and rights and interests
in and to real property, and to manage, operate, maintain, improve,
and develop the same.
To manufacture, purchase or otherwise acquire, invest in, own,
mortgage, pledge, sell, assign and transfer or otherwise dispose of,
trade, deal in and deal with machinery, equipment, pipe, appliances,
building materials, goods, wares and merchandise and personal property
of every class and description.
To acquire, and pay for in cash, stock, or bonds of the
corporation or otherwise, the good will, rights, assets and property,
and to undertake or assume the whole or any part of the obligations or
liabilities, of any person, firm, association or corporation.
To acquire, hold, use, sell, assign, lease, grant licenses in
respect of, mortgage or otherwise dispose of letters patent of the
United States or any foreign country, patent rights, licenses and
privileges, inventions, improvements and processes, copyrights,
trademarks and trade-names, relating to or useful in connection with
any business of this corporation.
To acquire by purchase, subscription or otherwise, and to
receive, hold, own, guarantee, sell, assign, exchange, transfer,
mortgage, pledge or otherwise dispose of or deal in or with any of the
shares of capital stock, or any voting trust certificates in respect
of shares of capital stock, or any scrip, warrants, rights, bonds,
debentures, notes, trust receipts, obligations, evidences of
indebtedness or interest or other securities or choses in action,
issued or created by any corporations, joint stock companies,
syndicates, associations, firms, trusts or persons, public or private,
or by the government of the United States of America, or by any
foreign government, or by any state, territory, province, municipality
or other political subdivision or by any governmental agency, and as
owner thereof to possess and exercise all the rights, powers and
privileges of ownership, including the right to execute consents and
vote thereon, and to do any and all acts and things necessary or
advisable for the preservation, protection, improvement and
enhancement in value thereof.
To enter into, make and perform contracts of every kind and
description with any person, firm, association, corporation,
municipality, county, state, body politic or government or colony or
dependency thereof.
To borrow or raise moneys for any of the purposes of the
2
corporation and, from time to time, without limit as to amount, to
draw, make, accept, endorse, execute and issue promissory notes,
drafts, bills of exchange, warrants, bonds, debentures and other
negotiable or non-negotiable instruments and evidences of
indebtedness, and to secure the payment of any thereof and of the
interest thereon by mortgage upon or pledge, conveyance or assignment
in trust of the whole or any part of the property of the corporation,
whether at the time owned or thereafter acquired, or by assignment of
the proceeds, applicable to the corporation's interest, in any and all
oil, gas and other hydrocarbons or minerals produced from any
properties in which the corporation may own any interest, or by
assignment of any moneys owing or to be owing to the corporation, or
otherwise and to sell, pledge or otherwise dispose of such bonds or
other obligations of the corporation for its corporate purposes.
To buy, sell or otherwise deal in notes, open accounts, and other
similar evidences of debt, or to loan money and take notes, open
accounts, and other similar evidences of debt as collateral security
therefor.
To purchase, hold, sell and transfer the shares of its own
capital stock; provided it shall not use its funds or property for the
purchase of its own shares of capital stock when such use would cause
any impairment of its capital except as otherwise permitted by law,
and provided further that shares of its own capital stock belonging to
it shall not be voted upon directly or indirectly.
To have one or more offices, to carry on all or any of its
operations and business and, without restriction or limit as to
amount, to purchase or otherwise acquire, hold, own, mortgage, sell,
convey or otherwise dispose of real and personal property of every
class and description in any of the States, Districts, Territories or
Colonies of the United States, and in any and all foreign countries,
subject to the laws of such State, District, Territory, Colony or
Country.
In general, to carry on any other business in connection with the
foregoing, and to have and exercise all the powers conferred by the
laws of Delaware upon corporations formed under the act hereinafter
referred to, and to do any or all of the things hereinbefore set forth
to the same extent as natural persons might or could do; provided,
however, that nothing herein contained shall be deemed to authorize
this corporation to carry on within the State of Delaware any public
utility business.
The objects and purposes specified in the foregoing clauses
shall, except where otherwise expressed, be in nowise limited or
restricted by reference to, or inference from, the terms of any other
clause in this certificate of incorporation, but the objects and
purposes specified in each of the foregoing clauses of this article
shall be regarded as independent objects and purposes.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is forty million (40,000,000)
shares, divided into ten million (10,000,000) shares of Preferred Stock, of
3
the par value of one dollar ($1.00) per share (herein called "Preferred
Stock"), and thirty million (30,000,000) shares of Common Stock, of the par
value of one dollar per share (herein called "Common Stock").
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of the classes of stock of the corporation:
I.
1. The Preferred Stock may be issued in one or more series. The
designations, powers, preferences and relative, participating,
optional, and other special rights, and the qualifications,
limitations and restrictions thereof, of the Preferred Stock of each
series shall be such as are stated and expressed herein and to the
extent not stated and expressed herein, shall be such as may be fixed
by the Board of Directors (authority so to do being hereby expressly
granted) and stated and expressed in a resolution or resolutions
adopted by the Board of Directors providing for the issue of Preferred
Stock of such series. Such resolution or resolutions shall (a)
specify the series to which such Preferred Stock shall belong, (b) fix
the dividend rate therefor, (c) fix the amount which the holders of
the Preferred Stock of such series shall be entitled to be paid in the
event of a voluntary or involuntary liquidation, dissolution or
winding up of the corporation, (d) state whether or not the Preferred
Stock of such series shall be redeemable and at what times and under
what conditions and the amount or amounts payable thereon in the event
of redemption; and may, in a manner not inconsistent with the
provisions of this Article Fourth, (i) limit the number of shares of
such series which may be issued, (ii) provide for a sinking fund for
the purchase or redemption or a purchase fund for the purchase of
shares of such series and the terms and provisions governing the
operation of any such fund and the status as to reissuance of shares
of Preferred Stock purchased or otherwise re-acquired or redeemed or
retired through the operation thereof, (iii) grant voting rights to
the holders of shares of such series, (iv) impose conditions or
restrictions upon the creation of indebtedness of the corporation or
upon the issue of additional Preferred Stock or other capital stock
ranking equally therewith or prior thereto as to dividends or
distributions of assets on liquidation, (v) impose conditions or
restrictions upon the payment of dividends upon, or the making of
other distributions to, or the redemption, purchase or acquisition of
shares of capital stock ranking junior to the Preferred Stock as to
dividends or distribution of assets upon liquidation (referred to in
this Article Fourth as "junior stock"), (vi) grant to the holders of
the Preferred Stock of such series the right to convert such stock
into other shares of the corporation, and (vii) grant such other
special rights to the holders of shares of such series as the
directors may determine. The term "fixed for such series" and similar
terms shall mean stated and expressed in this Article Fourth or in a
resolution or resolutions adopted by the Board of Directors providing
for the issue of Preferred Stock of the series referred to.
2. The holders of the Preferred Stock of the respective series
shall be entitled to receive, when and as declared by the Board of
4
Directors, out of any funds legally available therefor, cumulative
preferential dividends in cash, at the rate per annum fixed for such
series, and no more, payable quarter-yearly on the first days of
February, May, August and November to stockholders of record on a
date, not exceeding fifty days preceding each such dividend payment
date fixed for the purpose by the Board of Directors in advance of
payment of each particular dividend. Dividends on shares of the
Preferred Stock shall accrue from the dividend payment date
immediately preceding the date of issuance (unless the date of
issuance shall be a dividend payment date, in which case they shall
accrue from that date), or from such other date or dates as may be
fixed by the Board of Directors for any series, and shall be
cumulative.
3. Except as by law expressly provided and except as may be
provided for any series of Preferred Stock by the resolution of the
Board of Directors providing for the issuance thereof as herein
permitted, the Preferred Stock shall have no right or power to vote on
any question or in any proceeding or to be represented at or to
receive notice of any meeting of stockholders.
4. Preferred Stock redeemed or otherwise retired by the
corporation shall assume the status of authorized but unissued
preferred stock and may thereafter, subject to the provisions of this
Article Fourth and of any restrictions contained in any resolution of
the Board of Directors providing for the issue of any particular
series of Preferred Stock, be reissued in the same manner as other
authorized but unissued Preferred Stock:
II.
Subject to and on the conditions set forth in any resolution of
the Board of Directors providing for the issuance of any particular
series of Preferred Stock, and not otherwise, such dividends (payable
in cash, stock or otherwise) as may be determined by the Board of
Directors may be declared and paid on the Common Stock from time to
time out of any funds legally available therefor.
The holders of the Common Stock shall be entitled to one vote for
each share held at all meetings of the stockholders of the
corporation.
FIFTH: The minimum amount of capital with which the corporation will
commence business is $1,000.
SIXTH: The names and places of residence of the incorporators are as
follows:
Names Residences
H. K. Webb Wilmington, Delaware
H. C. Broadt Wilmington, Delaware
A. D. Atwell Wilmington, Delaware
5
SEVENTH: The corporation is to have perpetual existence.
EIGHTH: The private property of the stockholders shall not be subject to
the payment of corporate debts to any extent whatever.
NINTH: No holder of stock of the corporation of any class authorized
hereby or which may hereafter be authorized, or any series of any such
class, shall as such holder and because of his ownership of such stock have
any preemptive or other right to purchase or subscribe for any shares of
stock of the corporation of any class, or of any series of any class, or
for any notes, debentures, bonds, obligations or instruments which the
corporation may issue or sell that are convertible into or exchangeable for
or entitle the holders thereof to subscribe for or purchase any shares of
stock of the corporation of any class, or of any series of any class. Any
part of the stock of the corporation and any part of any notes, debentures,
bonds, obligations, or instruments convertible into or carrying options or
warrants to purchase stock of the corporation of any class authorized
hereby, or which may hereafter be authorized, may at any time be issued,
optioned for sale and sold or otherwise disposed of pursuant to resolutions
of the Board of Directors to such persons, upon such terms and conditions
and for such lawful consideration, as may to the Board of Directors seem
proper and advisable, without first offering said stock or such other
securities, or any part thereof, to any holders of stock of the
corporation.
TENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
To make, alter or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.
To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created.
By resolution or resolutions passed by a majority of the whole
Board to designate one or more committees, each committee to consist
of two or more of the directors of the corporation, which, to the
extent provided in said resolution or resolutions or in the by-laws of
the corporation, shall have and may exercise the powers of the Board
of Directors in the management of the business and affairs of the
corporation, and may have power to authorize the seal of the
corporation to be affixed to all papers which may require it. Such
committee or committees shall have such name or names as may be stated
in the by-laws of the corporation or as may be determined from time to
time by resolution adopted by the Board of Directors.
When and as authorized by the affirmative vote of the holders of
a majority of the stock issued and outstanding having voting power
given at a stockholders' meeting duly called for that purpose, or when
authorized by the written consent of the holders of a majority of the
voting stock issued and outstanding, to sell, lease or exchange all of
the property and assets of the corporation, including its good will
6
and its corporate franchises, upon such terms and conditions and for
such consideration, which may be in whole or in part shares of stock
in, and/or other securities of, any other corporation or corporations,
as its Board of Directors shall deem expedient and for the best
interests of the corporation.
ELEVENTH: No contract or other transaction between the corporation and any
other corporation shall be affected or invalidated by the fact that any one
or more of the directors of this corporation is or are interested in or is
or are a director or directors or officer or officers of such other
corporation, and no contract or other transaction between the corporation
and any other person or firm shall be affected or invalidated by the fact
that any one or more directors of this corporation is a party to, or are
parties to, or interested in, such contract or transaction; provided that
in each such case the nature and extent of the interest of such director or
directors in such contract or other transaction and/or the fact that such
director or directors is or are a director or directors or officer or
officers of such other corporation is disclosed at the meeting of the Board
of Directors at which such contract or other transaction is authorized.
TWELFTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application
in a summary way of this corporation or of any creditors or stockholders
thereof, or on the application of any receiver or receivers appointed for
this corporation under the provisions of section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this corporation under the provisions
of section 279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as
the case may be, agree to any compromise or arrangement and to any
reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been
made, be binding on all the.creditors or class of creditors, and/or on all
the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
THIRTEENTH: Meetings of stockholders may be held without the State of
Delaware, if the by-laws so provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside of the
State of Delaware at such place or places as may be from time to time
designated by the Board of Directors or in the by-laws of the corporation.
FOURTEENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
7
FIFTEENTH: To the fullest extent permitted by the General Corporation Law
of the State of Delaware as the same exists or may hereafter be amended, a
director of the corporation shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as director.
Any repeal or modification of this Article shall not result in any
liability for a director with respect to any action or omission occurring
prior to such repeal or modification.
8
HONDO OIL & GAS COMPANY
BYLAWS
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the
Corporation shall be located in the City of Wilmington, County of New
Castle, State of Delaware, and the name of the resident agent in charge
thereof shall be The Corporation Trust Company.
Section 2. Other Offices. The Corporation may also have
offices at such other places, within or without the State of Delaware, as
the Board of Directors may from time to time appoint or the business of the
Corporation may require.
ARTICLE II
Seal
The corporate seal shall be circular in form and shall contain
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware".
ARTICLE III
Meeting of Stockholders
Section 1. Place of Meeting. Meetings of the stockholders for
the selection of directors shall be held at such place within the State of
New Mexico, or such other place, as the Board of Directors may fix,
provided that at least ten (10) days' notice be given to stockholders
entitled to vote thereat of the place so fixed. Each other meeting of the
stockholders may be held at such place, either within or without the State
of Delaware, as may be stated in the notice or waiver of notice of such
meeting.
Section 2. Annual Meetings. The Annual Meeting of
Stockholders shall be held on such date and at such time each year as shall
be designated from time to time by the Board of Directors and stated in the
notice of the meeting, at which meeting the stockholders shall elect
directors by a plurality vote and shall transact such other business as may
properly be brought before the meeting.
Section 3. Special Meeting. Special meetings of the
stockholders for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, may be called by the
Chairman of the Board of Directors, the President or by the Board of
Directors (either by written instrument signed by a majority or by
resolution adopted by a vote of the majority), and special meetings shall
be called by the Chairman, the President or the Secretary whenever
stockholder owning a majority of the capital stock issued, outstanding and
entitled to vote so request in writing. Such request shall state the
purpose or purposes of the proposed meeting.
1
Section 4. Notice. Written or printed notice of every meeting
of stockholders, annual or special, stating the time and place thereof,
and, if a special meeting, the purpose or purposes in general terms for
which the meeting is called shall not less than ten (10) days before such
meeting be served upon or mailed to each stockholder entitled to vote
thereat, at his address as it appears upon the stock records of the
Corporation or, if such stockholder shall have filed with the Secretary of
the Corporation a written request that notices intended for him be mailed
to some other address, then to the address designated in such request.
Notice of the time, place and/or purpose of any meeting of
stockholders may be dispensed with if every stockholder entitled to vote
thereat shall attend either in person or by proxy, or if every absent
stockholder entitled to such notice shall in writing, filed with the
records of the meeting, either before or after the holding thereof, waive
such notice.
SECTION 5. Quorum. Except as otherwise provided by law or by
the Certificate of Incorporation, the presence in person or by proxy at any
meeting of stockholders of the holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to
vote thereat, shall be requisite and shall constitute a quorum. If,
however, such majority shall not be present or represented at any meeting
of the stockholders regularly called, the holders of a majority of the
shares present or represented and entitled to vote thereat shall have power
to adjourn the meeting to another time, or to another time and place,
without notice other than announcement of adjournment at the meeting, and
there may be successive adjournment for like cause and in like manner until
the requisite amount of shares entitled to vote at such meeting shall be
represented. At such adjourned meeting at which the requisite amount of
shares entitled to vote thereat shall be present or represented, any
business may be transacted which might have been transacted at the meeting
as originally notified.
SECTION 6. Votes. Proxies. At each meeting of stockholders,
every stockholder shall have one vote for each share of capital stock
entitled to vote which is registered in his name on the books of the
Corporation on the date on which the transfer books were closed, if closed,
or on the date set by the Board of Directors for the determination of
stockholders entitled to vote at such meeting. At each such meeting every
stockholder shall be entitled to vote in person, or by proxy appointed by
an instrument in writing subscribed by such stockholder and bearing a date
not more than three years prior to the meeting in question, unless said
instrument provides for a longer period during which it is to remain in
force.
All elections of directors shall be held by ballot. If the
Chairman of the meeting shall so determine, a vote may be taken upon any
other matter by ballot, and shall be so taken upon the request of any
stockholder entitled to vote on such matter.
At elections of directors, the Chairman shall appoint two
inspectors of election, who shall first take and subscribe an oath or
affirmation faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of their ability and who
2
shall take charge of the polls and after the balloting shall make a
certificate of the result of the vote taken; but no director or candidate
for the office of director shall be appointed as such inspector.
A nomination for the position of director shall be accepted,
and votes cast for a proposed nominee shall be counted, by the inspectors
of election only if the Secretary of the Company has received at least 30
days prior to the meeting a statement over the signature of the proposed
nominee that he consents to being a nominee and, if elected, intends to
serve as a director. Such statement shall also contain the number of
shares of stock of the Corporation held by the nominee, occupations and
business history for the previous five years, other directorships, names of
business entities in which the proposed nominee owns a 10 percent or more
equity interest, listing of any criminal convictions including federal or
state securities violations, and all other information required by the
federal proxy rules in effect at the time the proposed nominee submits said
statement.
SECTION 7. Organization. The Chairman of the Board, if there
be one, or in his absence the President, or in the absence of both the
Chairman of the Board and the President, a Vice President, shall call
meetings of the stockholders to order and shall act as chairman thereof.
The Secretary of the Corporation, if present, shall act as secretary of all
meetings of stockholders and, in his absence, the presiding officer may
appoint a secretary.
ARTICLE IV
Directors
SECTION 1. Number. The business and property of the
Corporation shall be conducted and managed by a Board of Directors
consisting of not less than three (3) nor more than eleven (11) directors,
none of whom need be a stockholder. The Board of Directors of the
Corporation shall initially be composed of five (5) directors, but the
Board may at any time by resolution increase or decrease the number of
directors to not more than eleven (11) or less than three (3), and the
vacancies resulting from any such increase shall be filled as provided in
Section 3 of this Article IV.
SECTION 2. Term of Office. Each director shall hold office
until the next annual meeting of stockholders and until his successor is
duly elected and qualified or until his earlier death or resignation,
subject to the right of the stockholders at any time to remove any director
or directors as provided in Section 4 of this Article.
SECTION 3. Vacancies. If any vacancy shall occur among the
directors, or if the number of directors shall at any time be increased,
the directors in office, although less than a quorum, by a majority vote
may fill the vacancies or newly created directorships, or any such
vacancies or newly created directorships may be filled by the stockholders
at any meeting.
SECTION 4. Removal by Stockholders. The holders of record of
the capital stock of the Corporation entitled to vote for the election of
directors may in their discretion at any meeting duly called for the
3
purpose, by a majority vote, remove any director or directors and elect a
new director or directors in place thereof.
SECTION 5. Meetings. Meetings of the Board of Directors shall
be held at such place within or without the State of Delaware, as may from
time to time be fixed by resolution of the Board or as may be specified in
the notice or waiver of notice of any meeting. Meetings may be held at any
time upon the call of the Chairman, the President or the Secretary or any
two (2) or the directors by oral, telegraphic, or written notice, duly
served or sent or mailed to each director not less than two (2) days before
such meeting. Meetings may be held at any time and place without notice if
all the directors are present or if those not present shall, in writing or
by telegram, waive notice thereof. A regular meeting of the Board may be
held without notice immediately following the annual meeting of
stockholders at the place where such annual meeting is held or at such
other place, as determined by the directors. Regular meetings of the Board
may also be held without notice at such time and place as shall from time
to time be determined by resolution of the Board.
SECTION 6. Action Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors
or of any committee thereof may be taken without a meeting, if all members
of the Board or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of
the Board or committee.
SECTION 7. Telephone Meetings. Subject to the provisions of
applicable law and these Bylaws regarding notice of meetings, members of
the Board of Directors or members of any committee designated by such Board
may, unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, participate in and hold a meeting of such Board of Directors
or committee by using conference telephone or similar communications
equipment by means of which all persons participating in the meeting can
hear each other, and participation in a meeting pursuant to this Section
shall constitute presence in person at such meeting, except when a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting was not lawfully
called or convened.
SECTION 8. Quorum. A majority of the directors shall
constitute a quorum for the transaction of business. If at any meeting of
the Board there shall be less than a quorum present, a majority of those
present may adjourn the meeting from time to time without notice other than
announcement of the adjournment at the meeting, and at such adjourned
meeting at which a quorum is present any business may be transacted which
might have been transacted at the meeting as originally noticed.
SECTION 9. Compensation. Directors, as such, shall not
receive any stated compensation for their services, but by resolution of
the Board of Directors, a fixed sum, and expenses of attendance, if any,
may be allowed for attendance at each regular or special meeting thereof.
By resolution of the Board of Directors, outside directors who do not
receive compensation from the Corporation in any other capacity may receive
compensation for their services. Nothing in this Section shall be
4
construed to preclude a director from serving the Corporation in any other
capacity and receiving compensation therefor.
ARTICLE V
Executive Committee
SECTION 1. Executive Committee. The Board of Directors may
appoint an Executive Committee of three (3) or more members (with such
alternates, if any, as may be deemed desirable), to serve during the
pleasure of the Board, to consist of such directors as the Board may from
time to time designate. The Chairman of the Executive Committee shall be
designated by the Board of Directors.
SECTION 2. Procedure. The Executive Committee, by a vote of a
majority of its members, shall fix its own times and places of meeting,
shall determine the number of its members constituting a quorum for the
transaction of business, and shall prescribe its own rules or procedure; no
change in which shall be made save by a majority vote to its members.
SECTION 3. Powers. During the intervals between the meetings
of the Board of Directors, the Executive Committee shall possess and may
exercise all the powers of the Board in the management and direction of the
business and affairs of the Corporation.
SECTION 4. Reports. The Executive Committee shall keep
regular minutes of its proceedings and all action by the Executive
Committee shall be reported promptly to the Board of Directors. Such
action shall be subject to review by the Board, provided that no rights of
third parties shall be affected by such review.
ARTICLE VI
Other Committee of the Board of Directors
The Board of Directors may designate one or more directors
(with such alternate, if any, as may be deemed desirable) to constitute
another committee or committees for any purpose, which shall have and may
exercise the powers of the Board of Directors in the management of the
business and affairs of the Corporation, and may have power to authorize
the seal of the Corporation to be affixed to all papers which may require
it.
ARTICLE VII
Officers
SECTION 1. Officers. The Board of Directors shall elect, as
executive officers, a Chairman of the Board of Directors (who may also
occupy the office of President), a President, a Secretary and a Treasurer,
one or more Vice Presidents (in the case of each such Vice President, with
such descriptive title, if any, as the Board of Directors may deem
appropriate), and one or more Assistant Secretaries and Assistant
Treasurers. The Chairman of the Board of Directors or the President may
also be the Chief Executive Officer, as designated by the Board of
Directors.
5
SECTION 2. Vacancies. Any vacancy in any office may be
filled for the unexpired portion of the term by the Board of Directors, at
any regular or special meeting.
SECTION 3. President. The President may be a member of the
Board of Directors and the chief operating officer of the Corporation.
Subject to the directions of the Board of Directors, he shall have any
exercise direct charge of and general supervision over the business and
affairs of the Corporation and shall perform all duties incident to the
office of a president of a corporation, and such other duties as from time
to time may be assigned to him by the Board of Directors.
SECTION 4. Chairman of the Board. The Chairman of the Board,
if elected, shall be a member of the Board of Directors and shall preside
at its meetings. He shall keep in close touch with the administration of
the affairs of the Corporation, shall advise and counsel with the
President, and, in his absence, with other executives of the Corporation,
and shall perform such other duties as may from time to time be assigned to
him by the Board of Directors.
SECTION 5. Vice Presidents. Each Vice President, if elected,
shall be and exercise such powers and shall perform such duties as from
time to time may be conferred upon or assigned to him by the Board of
Directors, or as may be delegated to him by the President.
SECTION 6. Secretary. The Secretary shall keep the minutes of
all meetings of the stockholders and of the Board of Directors in books
provided for the purpose; he shall see that all notices are duly given in
accordance with the provisions of law and these bylaws; he shall be
responsible for the custody and safekeeping of the records, and of the
corporate seal or seals of the Corporation; he shall see that the corporate
seal is affixed to all documents, the execution of which, on behalf of the
Corporation, under its seal, is duly authorized and when the seal is so
affixed he may attest the same; he may sign, with the President or Vice
President, certificates of stock of the Corporation; and in general, he
shall perform all duties incident to the office of a secretary of a
corporation, and such other duties as from time to time may be assigned to
him by the Board of Directors.
SECTION 7. Assistant Secretaries. The Assistant Secretaries
shall, in the absence or disability or at the direction of the Secretary,
perform the duties and exercise the powers of the Secretary and shall
perform such other duties as the Board of Directors shall prescribe.
SECTION 8. Treasurer. The Treasurer shall have charge of and
be responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of
the Corporation, all moneys or other valuable effects in such banks, trust
companies or other depositaries as shall, from time to time, be selected by
the Board of Directors; he may indorse for collection on behalf of the
Corporation, checks, notes and other obligations; he may sign receipts and
vouchers for payments made to the Corporation; singly or jointly with
another person as the Board of Directors may authorize, he may sign checks
of the Corporation and pay out and dispose of the proceeds under the
direction of the Board; he shall render to the President and to the Board
6
of Directors, whenever requested, an account of the financial condition of
the Corporation; he may sign, with the President or a Vice President,
certificates of stock of the Corporation; and in general, shall perform
all the duties incident to the office of a treasurer of a corporation, and
such other duties as from time to time may be assigned to him by the Board
of Directors.
SECTION 9. Assistant Treasurers. The Assistant Treasurers
shall, in the absence or disability or at the direction of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall
perform such other duties as the Board of Directors shall prescribe.
SECTION 10. Subordinate Officers. The Board of Directors may
appoint such subordinate officers as it may deem desirable. Each such
officer shall hold office for such period, have such authority and perform
such duties as the Board of Directors may prescribe. The Board of
Directors may, from time to time, authorize any officer to appoint and
remove subordinate officers and to prescribe the powers and duties thereof.
SECTION 11. Compensation. The Board of Directors shall have
power to fix the compensation of all officers of the Corporation. It may
authorize any officer, upon whom the power of appointing subordinate
officers may have been conferred, to fix the compensation of such
subordinate officers.
SECTION 12. Removal. Any officer of the Corporation may be
removed, with or without cause, by a majority vote of the Board of
Directors at a meeting called for that purpose.
SECTION 13. Bonds. The Board of Directors may require any
officer of the Corporation to give a bond to the Corporation, conditional
upon the faithful performance of his duties, with one or more sureties and
in such amount as may be satisfactory to the Board of Directors.
ARTICLE VIII
Certificates of Stock
SECTION 1. Form and Execution of Certificates. The interest
of each stockholder of the Corporation shall be evidenced by a certificate
or certificates for shares of stock in such form as the Board of Directors
may from time to time prescribe. The certificates of stock of each class
and series shall be consecutively numbered and signed by the President or
Vice President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer of the Corporation, and may be
countersigned and registered in such manner as the Board of Directors may
by resolution prescribe, and shall bear the corporate seal or a printed or
engraved facsimile thereof. Where any such certificate is signed by a
transfer agent or transfer clerk acting on behalf of the Corporation and by
a registrar, the signatures of any such President, Vice President,
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary may be
facsimiles, engraved or printed. In case any officer or officers who shall
have signed, or whose facsimile signature or signatures shall have been
used on, any such facsimile signature or signature shall have been used on,
any such certificate or certificates shall cease to be such officer or
officers, whether because of death, resignation or otherwise, before such
7
certificate or certificates shall have been delivered by the Corporation,
such certificate or certificates may nevertheless be issued and delivered
by the Corporation as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures
shall have been used thereon had not ceased to be such officer or officers.
SECTION 2. Transfer of Shares. Subject to any applicable
restrictions contained in the Certificate of Incorporation, the shares of
the stock of the Corporation shall be transferred on the books of the
Corporation by the holder thereof in person or by his attorney lawfully
constituted, upon surrender for cancellation of certificates for the same
number of shares, with an assignment and power of transfer endorsed thereon
or attached thereto, duly executed, with such proof or guaranty of the
authenticity of the signature as the Corporation or its agents may
reasonably require. The Corporation shall be entitled to treat the holder
of record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person whether
or not it shall have express or other notice thereof, save as expressly
provided by law or by the Certificate of Incorporation.
SECTION 3. Closing of Transfer Books. The stock transfer
books of the Corporation may, if deemed expedient by the Board of
Directors, be closed for such length of time not exceeding sixty (60) days
as the Board may determine, preceding the date of any meeting of
stockholders or the date for the payment of any dividend or the date for
the allotment of rights or the date when any issuance, change, conversion
or exchange of capital stock shall go into effect, during which time no
transfer of stock on the books of the Corporation may be made.
SECTION 4. Dates of Record. If deemed expedient, the Board of
Directors may fix in advance a date for such length of time not exceeding
sixty (60) days as the Board may determine, preceding the date of any
meeting of stockholders, or the date for the payment of any dividend, or
the date for the allotment of rights or the date when any issuance, change,
conversion or exchange or capital stock shall go into effect, as a record
date for the determination of the stockholders entitled to notice of, and
to vote at, any such meeting or entitled to receive payment of any such
dividend or to any such allotment of rights, or to exercise the rights in
respect of any such issuance, change, conversion or exchange of capital
stock, as the case may be, and in such case only such stockholders as shall
be stockholders of record on the date so fixed shall be entitled to such
notice of, and to vote at, such meeting, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any stock on
the books of the Corporation after any record date fixed as aforesaid;
provided, however, that no record date for the determination of the
stockholders entitled to notice of, and to vote at, any meeting of
stockholders shall be fixed on a date less than ten (10) days before the
date of such meeting.
SECTION 5. Lost or Destroyed Certificates. In case of the
loss or destruction of any certificate of stock, a new certificate may be
issued upon the following conditions:
8
The owner of said certificate shall file with the Secretary of
the Corporation an affidavit giving the facts in relations to the
ownership, and in relation to the loss or destruction of said certificate,
stating its number and the number of shares represented thereby; such
affidavit to be in such form and contain such statements as shall satisfy
the President and Secretary that said certificate has been accidentially
destroyed or lost, and that a new certificate ought to be issued in lieu
thereof. Upon being so satisfied, the President and Secretary shall
require such owner to file with the Secretary a bond in such penal sum and
in such form as they may deem advisable, and with a surety or sureties
approved by them, to indemnify and save harmless the Corporation from any
claim, loss, damage or liability which may be occasioned by the issuance of
a new certificate in lieu thereof. Upon such bond being so filed a new
certificate for the same number of shares shall be issued to the owner of
the certificate so lost or destroyed; and the transfer agent and registrar
of stock shall countersign and register such new certificate upon receipt
of a written order signed by the said President and Secretary, and
thereupon the Corporation will save harmless said transfer agent and
registrar in the premise. A Vice President may act hereunder in the stead
of the President, and an Assistant Secretary in the stead of the Secretary.
In case of the surrender of the original certificate, in lieu of which a
new certificate has been issued, or the surrender of such new certificate,
for cancellation, the bond or indemnity given as a condition of the issue
of such new certificate may be surrendered.
ARTICLE IX
Checks, Notes, Etc.
SECTION 1. Execution of Checks, Notes Etc. All checks and
drafts on the Corporation's bank accounts and all bills of exchange and
promissory notes, and all acceptances, obligations and other instruments
for the payment of money, shall be signed by such officer or officers,
agent or agents, as shall be thereunto authorized from time to time by the
Board of Directors.
SECTION 2. Execution of Contracts, Assignments, Etc. All
contracts, agreements, endorsements, assignments, transfers, stock powers,
or other instruments shall be signed by the President, the Chairman of the
Board, or any Vice President or by such other officer of officers, agent or
agents, as shall be thereunto authorized from time to time by the Board of
Directors; and, when necessary or appropriate, shall be attested by the
Secretary or any Assistant Secretary or the Treasurer or any Assistant
Treasurer.
SECTION 3. Execution of Proxies. The President or the
Chairman of the Board or, in their absence or disability, a Vice President,
may authorize from time to time the signature and issuance of proxies to
vote shares of stock of other companies standing in the name of the
Corporation. All such proxies shall be signed in the name of the
Corporation by the President, the Chairman of the Board or a Vice President
and by the Secretary or an Assistant Secretary.
9
ARTICLE X
Waivers and Consents
Whenever any notice is required to be given by law, or under
the provisions of the Certificate of Incorporation, or of these bylaws,
such notice may be waived, in writing, signed by the person or persons
entitled to such notice, or by his attorney or attorneys thereunto
authorized, whether before or after the event or action to which such
notice relates.
Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action
by any provision of law or of the Certificate of Incorporation or of these
bylaws, the meeting and vote of stockholders may be dispensed with if all
the stockholders who would have been entitled to vote upon the action if
such meeting were held shall consent in writing to such action being taken.
Any action required or permitted to be taken at any meeting of
the Board of Directors or of any Committee of the Board of Directors may be
taken without a meeting, if prior to such action a written consent thereto
is signed by all members of the Board of Directors or of such Committee as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or of such Committee.
ARTICLE XI
Dividends
Except as otherwise provided by law or by the Certificate of
Incorporation, the Board of Directors may declare dividends out of the
surplus of the Corporation at such times and in such amounts as it may from
time to time designate.
Before crediting net profits to surplus in any year, there may
be set aside out of the net profits of the Corporation for that year such
sum or sums as the Board of Directors from time to time in its absolute
discretion may deem proper as a reserve fund or funds to meet contingencies
or for equalizing dividends or for repairing or maintaining any property of
the Corporation or for such other purpose as the Board of Directors shall
deem conducive to the interests of the Corporation.
ARTICLE XII
Indemnification and Insurance
SECTION 1. Right to Indemnification. Each person who was or
is a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or
was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
10
Corporation to the fullest extent permitted by the laws of Delaware, as the
same exist or may hereafter be amended, against all costs, charges,
expenses, liabilities and losses (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided,
however, that, except as provided in Section 2 hereof, the Corporation
shall indemnify any such person seeking indemnification in connection with
a proceeding (or part thereof) initiated by such person only if such
proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article
shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by
a director or officer in his or her capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such
person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director of officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer is not entitled to be indemnified under this Section or
otherwise. The Corporation may, by action of its Board of Directors,
provide indemnification to employees and agents of the Corporation with the
same scope and effect as the foregoing indemnification of directors and
officers.
SECTION 2. Right of Claimant to Bring Suit. If a claim under
Section 1 of this Article is not paid in full by the Corporation within
thirty days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in
defending and proceeding in advance of its final disposition where the
required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has failed to meet a standard of conduct
which makes it permissible under Delaware law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement
of such action that indemnification of the claimant is permissible in the
circumstances because he or she has met such standard or conduct, nor an
actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholder) that the claimant has not
met such standard or conduct, shall be a defense to the action or create a
presumption that the claimant has failed to meet such standard of conduct.
SECTION 3. Non-Exclusivity or Rights. The right to
indemnification and the payment of expenses incurred in defending a
proceeding in advance of its final disposition conferred in this Article
11
shall not be exclusive or any other right which any person may have or
hereafter acquire under any statute, provision of the Certificate of
Incorporation, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
SECTION 4. Insurance. The Corporation may maintain insurance,
at its expense, to protect itself and any director, officer, employee or
agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise against any such expense, liability or
loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under Delaware law.
SECTION 5. Expenses as a Witness. To the extent that any
director, officer, employee or agent of the Corporation is by reason of
such position, or a position with another entity at the request of the
Corporation, a witness in any action, suit or proceeding, he shall be
indemnified against all costs and expenses actually and reasonably incurred
by him or her or on his or her behalf in connection therewith.
SECTION 6. Indemnity Agreements. The Corporation may enter
into agreements with any director, officer, employee or agent of the
Corporation providing for indemnification to the full extent permitted by
Delaware law.
ARTICLE XIII
Inspection of Books
The Board of Directors shall determine from time to time
whether, and if allowed, when and under what conditions and regulations,
the accounts and books of the Corporation (except such as may be
specifically open to inspection) or any of them, shall be open to the
inspection of the stockholders and the stockholders' rights in this respect
are and shall be restricted and limited accordingly.
ARTICLE XIV
Fiscal Year
The fiscal year of the Corporation shall end on such dates as
the Board of Directors may by resolution specify and the Board of Directors
may by resolution change such date for future fiscal years at any time or
from time to time.
ARTICLE XV
Amendments
These Bylaws may be altered, amended or repealed and new Bylaws
adopted by the stockholders or by the Board of Directors by a majority vote
at any meeting called for that purpose.
12
[LETTERHEAD OF HONDO OIL & GAS COMPANY APPEARS HERE]
December 22, 1995
Lonrho Plc
Thamesedge Ltd.
4 Grosvenor Place
London, England SW1X 7DL
Dear Sirs:
This Agreement is entered into by and among HONDO OIL & GAS COMPANY, a
Delaware corporation ("Hondo"), and its wholly-owned subsidiaries, VIA
VERDE DEVELOPMENT COMPANY, a California corporation ("Via Verde"), and
NEWHALL REFINING CO., INC., a Delaware corporation ("Newhall"), LONRHO PLC
("Lonrho") and THAMESEDGE LTD. ("Thamesedge"), with reference to:
(a) Note Purchase Agreement dated November 28, 1988, between
Pauley Petroleum Inc. (now Hondo) and Thamesedge, as amended (the
"Thamesedge Note Purchase Agreement"), and Note dated November 30,
1988, for $75,000,000 from Pauley Petroleum Inc. to Thamesedge (the
"Thamesedge Note");
(b) Letter agreements dated November 28, 1988 and December 18,
1992 between Hondo and Thamesedge referring to and amending the
Thamesedge Note Purchase Agreement and the Thamesedge Note;
(c) Net Profits Share Agreement dated December 18, 1992, by and
among Hondo, Lonrho and Thamesedge (the "Net Profits Share
Agreement");
(d) Amended and Restated Letter Agreement dated December 20,
1991, between the Company and Lonrho (the "Lonrho Loan Agreement") and
Notes dated September 1, 1991, for $10 million, November 1, 1991, for
$9,000,000, and December 20, 1991, for $13,000,000, from Hondo to
Lonrho (the "Lonrho Notes");
(e) Letter agreement dated December 18, 1992 between Hondo and
Lonrho referring to and amending the Lonrho Loan Agreement and the
Lonrho Notes;
(f) Amended and Restated Guaranty of Robert O. Anderson dated
June 20, 1991, and Amendment to Amended and Restated Guaranty of
Robert O. Anderson dated December 20, 1991, guaranteeing the payment
of the Lonrho Notes described in paragraph (d), above (the "Anderson
Guaranty");
(g) Note dated April 30, 1993, for $3,000,000 from Via Verde to
Lonrho (the "Via Verde Note"), secured by Deed of Trust dated recorded
1
Lonrho Plc and Thamesedge, Ltd.
December 22, 1995
Page 2
as Instrument No. 93-840817 in the Real Property Records of Los
Angeles County, California, (the "Via Verde Mortgage"), guaranteed by
Hondo in Guaranty dated April 30, 1993 (the "Hondo Guaranty"), and
subject to a letter agreement dated April 30, 1993;
(h) Note dated June 25, 1993, for $4,000,000 from Hondo to
Lonrho (the "Valley Gateway Note"), secured by Deed of Trust dated
August 30, 1993, granted by Hondo and Newhall, recorded as Instrument
No. 93-2006475 in the Real Property Records of Los Angeles County,
California, (the "Valley Gateway Mortgage");
(i) Letter Agreement dated December 17, 1993, between Hondo, Via
Verde, Newhall, and Lonrho and Thamesedge, restructuring the above-
described indebtedness and amending the Thamesedge Note, the Lonrho
Notes, the Via Verde Note and the Valley Gateway Note;
(j) Letter Agreement dated November 10, 1994, between Hondo, Via
Verde and Newhall, and Lonrho and Thamesedge, restructuring again the
above-described indebtedness, amending the Thamesedge Note, the Lonrho
Notes, the Via Verde Note and the Valley Gateway Note, and creating a
new $5,000,000 loan facility and a Note therefor dated October 31,
1994 (the "Facility Note");
The Thamesedge Note, the Lonrho Notes, the Via Verde Note and the
Valley Gateway Note, each as amended, and the Facility Note are
collectively referred to herein as the "Lonrho Indebtedness".
Hondo, Lonrho and Thamesedge have agreed to extend the date of
repayment for the Lonrho Indebtedness (i) by changing the mandatory
redemption dates on the Thamesedge Note from November 1, 1996, 1997 and
1998, with an amount due on each date equal to one third of the aggregate
principal of the Original Notes outstanding at November 1, 1996, plus
accrued interest to each redemption date, to November 1, 1997 and 1998,
with an amount due on each date equal to one half of the aggregate
principal of the Original Notes outstanding at November 1, 1997, plus
accrued interest to each redemption date; and (ii) extend the principal
repayment date of each of the Lonrho Notes, the Via Verde Note, the Valley
Gateway Note and the Facility Note from October 1, 1996 to October 1, 1997.
Hondo, Via Verde and Newhall, and Lonrho and Thamesedge hereby agree,
as follows:
1. Effective Date. This Agreement shall be effective for all
purposes on September 30, 1995.
2. Amendment of Notes. The Thamesedge Note, the Lonrho Notes
(collectively), the Via Verde Note, the Valley Gateway Note and the
Facility Note each will be amended as provided, respectively, in Exhibits
A, B, C, D and E to this Agreement. Hondo and Via Verde, as applicable,
will execute the note amendments, Lonrho and Thamesedge, as applicable,
2
Lonrho Plc and Thamesedge, Ltd.
December 22, 1995
Page 3
will execute them to acknowledge consent thereto, and the note amendments
will be attached to the original notes held by Lonrho or Thamesedge.
3. Effect on Other Agreements. Except as amended by the note
amendments, the terms and provisions of the above-described agreements
relating to the Lonrho Indebtedness shall remain in full force and effect,
including, without limiting the generality of the foregoing, the Letter
Agreements dated December 17, 1993 and November 10, 1994.
Please confirm that the foregoing correctly sets forth the agreement
between us.
Very truly yours,
HONDO OIL & GAS COMPANY
By: /s/ C.B. McDaniel
----------------------------------
C.B. McDaniel, Secretary & Counsel
VIA VERDE DEVELOPMENT COMPANY
By: /s/ C.B. McDaniel
----------------------------------
C.B. McDaniel, Secretary
NEWHALL REFINING CO., INC.
By: /s/ C.B. McDaniel
----------------------------------
C.B. McDaniel, Secretary
Confirmed and accepted as of the date first above written:
LONRHO PLC
By: /s/ John F. Price
--------------------
John F. Price
Authorized signatory
THAMESEDGE LTD.
By: /s/ John F. Price
--------------------
John F. Price
Authorized signatory
3
Exhibit A
Thamesedge Note
This Note Amendment dated September 30, 1995 amends that certain 13
1/2% Senior Subordinated Note due 1998 dated November 28, 1998 in the
original principal amount of US $75,000,000, from Pauley Petroleum Inc.
(now Hondo Oil & Gas Company), to Thamesedge Ltd., as amended by Note
Amendments dated September 30, 1993 and September 30, 1994 (the "Original
Note"), and is attached to the Original Note. Effective on September 30,
1995, the Original Note is amended as follows:
1. Principal Amount. The principal amount of the Original Note now
owing is US $__________.
2. Principal Repayment. The mandatory Redemption dates on the
Original Note are amended to November 1, 1997 and November 1, 1998,
with an amount due on each date equal to one half of the aggregate
principal of the Original Note outstanding at November 1, 1997, plus
interest accrued to each redemption date.
3. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 22, 1995, by and
among Hondo Oil & Gas Company, Via Verde Development Company, Newhall
Refining Co. Inc., Thamesedge Ltd.
HONDO OIL & GAS COMPANY
By:_________________________
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
THAMESEDGE LTD.
By:_________________________
Name: _____________________
Title:______________________
Exhibit B
Lonrho Notes
This Note Amendment dated September 30, 1995 amends those certain
Promissory Notes dated September 1, 1991, in the original principal amount
of US $10,000,000, dated November 1, 1991, in the original principal amount
of US $9,000,000, and dated December 20, 1991, in the original principal
amount of US $13,000,000, each from Hondo Oil & Gas Company, to Lonrho Plc,
as amended by Note Amendments dated September 30, 1993 and September 30,
1994 (the "Original Notes") and is attached to the Original Notes.
Effective on September 30, 1995, each of the Original Notes is amended as
follows:
1. Principal Amount. The aggregate principal amount of the Original
Notes now owing is US $_____________.
2. Principal Repayment. The principal of the Original Notes is
payable on October 1, 1997.
4. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 22, 1995, by and
among Hondo Oil & Gas Company, Via Verde Development Company, Newhall
Refining Co. Inc., Thamesedge Ltd. and Lonrho Plc.
HONDO OIL & GAS COMPANY
By:_________________________
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
LONRHO PLC
By:_________________________
Name: _____________________
Title:______________________
Exhibit C
Via Verde Note
This Note Amendment dated September 30, 1995 amends that certain
Promissory Note dated April 30, 1993 in the original principal amount of US
$3,000,000, from Hondo Oil & Gas Company to Lonrho Plc, as amended by Note
Amendments dated September 30, 1993 and September 30, 1994 (the "Original
Note") and is attached to the Original Note. Effective on September 30,
1995 the Original Note is amended as follows:
1. Principal Amount. The principal amount of the Original Note now
owing is US $_____________.
2. Principal Repayment. The principal of this note is payable on the
earlier of (i) the sale of the property securing the loan or (ii) in
ten (10) semi-annual installments, commencing on October 1, 1997.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 22, 1995, by and
among Hondo Oil & Gas Company, Via Verde Development Company, Newhall
Refining Co. Inc., Thamesedge Ltd. and Lonrho Plc.
VIA VERDE DEVELOPMENT COMPANY
By:_________________________
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
LONRHO PLC
By:_________________________
Name: _____________________
Title:______________________
Exhibit D
Valley Gateway Note
This Note Amendment dated September 30, 1995 amends that certain
Promissory Note dated June 25, 1993 in the original principal amount of US
$3,000,000, from Hondo Oil & Gas Company to Lonrho Plc, as amended by Note
Amendments dated September 30, 1993 and September 30, 1994 (the "Original
Note") and is attached to the Original Note. Effective on September 30,
1995 the Original Note is amended as follows:
1. Principal Amount. The principal amount of the Original Note now
owing is US $_____________.
2. Principal Repayment. The principal of this note is payable on the
earlier of (i) the sale of the property securing the loan or (ii) in
ten (10) semi-annual installments, commencing on October 1, 1997.
5. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 22, 1995, by and
among Hondo Oil & Gas Company, Via Verde Development Company, Newhall
Refining Co. Inc., Thamesedge Ltd. and Lonrho Plc.
HONDO OIL & GAS COMPANY
By:_________________________
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
LONRHO PLC
By:_________________________
Name: _____________________
Title:______________________
Exhibit E
Facility Note
This Note Amendment dated September 30, 1995 amends that certain
Promissory Note dated October 31, 1994, in the original principal amount of
US $5,000,000 from Hondo Oil & Gas Company, to Lonrho Plc (the "Original
Note") and is attached to the Original Note. Effective on September 30,
1995, the Original Note is amended as follows:
1. Principal Amount. The aggregate principal amount of the Original
Notes now owing is US $_____________. There remains US$_____________
of principal on this note which has not been advanced to the borrower
as of September 30, 1995.
2. Principal Repayment. The principal of the Original Note is
payable on October 1, 1997.
4. Letter Agreement. This Note Amendment is issued and delivered
under that certain letter agreement dated December 22, 1995, by and
among Hondo Oil & Gas Company, Via Verde Development Company, Newhall
Refining Co. Inc., Thamesedge Ltd. and Lonrho Plc.
HONDO OIL & GAS COMPANY
By:_________________________
John J. Hoey, President
The undersigned hereby acknowledges and consents to this Note
Amendment.
LONRHO PLC
By:_________________________
Name: _____________________
Title:______________________
SUBSIDIARIES OF THE COMPANY
State/Country
Name* of Incorporation
----- ----------------
Hondo Magdalena Oil & Gas Limited Jersey/UK
Mackenzie Porcupine Pipeline Company Delaware
Newhall Refining Co., Inc. Delaware
Pauley Pacific Inc. Delaware
Pauley Transportation Delaware
Red-E-Crete, Inc. California
The Anderson Company New Mexico
Via Verde Development Company California
* None of the Company's subsidiaries use trade or other names under
which the do business.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
on:
Form S-3, File No. 33-52496, as amended on February 2, 1995,
Form S-3, File No. 33-59197, and
Form S-3, File No. 33-64015
of Hondo Oil & Gas Company and in the related Prospectus of our report
dated December 22, 1995, with respect to the consolidated financial
statements and schedule of Hondo Oil & Gas Company included in the Annual
Report on Form 10-K for the year ended September 30, 1995.
We also consent to the incorporation by reference in the Registration
Statements on:
Form S-8, File No. 33-34833,
Form S-8, File No. 33-53813, and
Form S-8, File No. 33-58517
of our report dated December 22, 1995, with respect to the consolidated
financial statements and schedule of Hondo Oil & Gas Company included in
the Annual Report on Form 10-K for the year ended September 30, 1995.
/s/ ERNST & YOUNG LLP
Denver, Colorado
December 28, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from Hondo Oil & Gas
Company's Form 10-K for the period identified
below. This information is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<PERIOD-TYPE> YEAR
<CASH> 1,771
<SECURITIES> 0
<RECEIVABLES> 839
<ALLOWANCES> 399
<INVENTORY> 0
<CURRENT-ASSETS> 2,218
<PP&E> 12,777
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,398
<CURRENT-LIABILITIES> 3,295
<BONDS> 82,213
0
0
<COMMON> 13,423
<OTHER-SE> (86,787)
<TOTAL-LIABILITY-AND-EQUITY> 18,398
<SALES> 23
<TOTAL-REVENUES> 44
<CGS> 0
<TOTAL-COSTS> 45
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,680
<INCOME-PRETAX> (6,843)
<INCOME-TAX> 113
<INCOME-CONTINUING> (6,956)
<DISCONTINUED> (4,950)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,906)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
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